2020 Universal registration document and annual financial report - BNP PARIBAS442
5 risks and CaPital adequaCy Pillar 3
5
Market risk
➤ TABLE 90: SENSITIVITY OF REVENUES TO GLOBAL INTEREST RATE RISK BASED ON A 50 BASIS POINT INCREASE OR DECREASE IN THE INTEREST RATES [Audited]
Sensivity of 2020 revenues In millions of euros
For +50 bp shock For -50 bp shock
EUR USD Other
currencies Total EUR USD Other
currencies Total
Year 1 2 74 50 125 246 (68) 0 179
Year 2 112 123 74 309 (1) (127) (19) (147)
Year 3 348 146 106 600 (173) (161) (52) (387)
Sensivity of 2019 revenues In millions of euros
For +50 bp shock For -50 bp shock
EUR USD Other
currencies Total EUR USD Other
currencies Total
Year 1 (259) (25) 13 (270) 275 19 (32) 263
Year 2 166 13 37 216 (220) (11) (57) (287)
Year 3 512 44 57 614 (474) (37) (76) (587)
Sensitivity of the value of the net assets of the banking intermediation activity
As the assets and liabilities of the Group s banking intermediation business are not intended to be sold, they are not recognised or managed on the basis of their theoretical economic value measured by discounting future cash flows. Similarly, the theoretical economic value of the net assets does not affect the Group s capital.
However, pursuant to the regulatory requirements and calculation methods laid down by the European Banking Authority (EBA), the ratios of sensitivity to variations of +/-200 basis points (+/-2%) in interest rates, of the theoretical economic value of the net assets of the intermediation business in relation to Tier 1 and Tier 2 capital are regularly calculated. These ratios are compared to the 20% threshold used by the supervisor to identify situations where interest rate risk in the banking book may be material. At end-2020, the ratio was -0.2% for a 200-basis-point decrease and -6.8% for a 200-basis-point increase. These values are both well below the materiality threshold of 20%. The regulatory floors as defined in the EBA s Guidelines on the management of interest rate risk arising from non-trading book activities are applied to interest rate shocks.
From 28 June 2021, with the application of Directive (EU) No. 2019/878 (CRD 5) transposed into French law on 21 December 2020, and Regulation (EU) No. 2019/876, the ratio will be revised to cover six rate scenarios (i.e. increase, decrease and with pentification or flattening of the interest rate curve), with currency-dependant shocks and a modified threshold of 15% of Tier 1 capital. This ratio is already regularly measured, and at the end of 2020, is between -8.0% and +0.5%, well below the 15% threshold.
HEDGING OF INTEREST RATE AND FOREIGN EXCHANGE RISKS Hedges initiated by the Group consist mainly of interest rate or currency hedges using derivative financial instruments (swaps, options and forwards).
Depending on the hedging objective, derivative financial instruments used for hedging purposes are qualified either as fair value hedges, cash flow hedges, or hedges of net investments in foreign operations. Each hedging relationship is formally documented at inception. The documentation describes the hedging strategy, identifies the hedged item and the hedging instrument, and the nature of the hedged risk; and describes the methodology used to test the expected (prospective) and actual (retrospective) effectiveness of the hedge.
Global interest rate risk
The Bank s strategy for managing global interest rate risk is mainly based on closely monitoring the sensitivity of the Bank s net income to changes in interest rates, factoring in all interest rate risks. The aim is to ensure the stability and regularity of the interest margin. This monitoring is based on an extremely accurate assessment of the risks incurred so that the Bank can determine the hedging strategy, after taking into account the effects of netting the different types of risk. These hedging strategies are defined and implemented by entity and by currency.
The hedges can comprise swaps and options and are typically accounted for as fair value hedges or cash flow hedges. They may also take the form of government securities and are classified on an accounting basis as Financial assets at amortised cost or Financial assets at fair value through equity .
In the eurozone, in a context of an exceptional health crisis, 2020 was marked by low or negative interest rate and low volatility. Without inflation and growth prospects, long-term interest rates remained negative, close to historic lows. This situation is partly explained by the European Central Bank s monetary policy in response to the pandemic and its economic consequences, a monetary policy aimed at increasing asset buybacks (mainly government bonds) and new Targeted Long-Term Refinancing Operations TLTRO , without modifying the deposit facility rate.
In the United States, the accommodative nature of the Federal Reserve s monetary policy has been extended, with the purchases of securities and a decrease in short- and long-term rates, while maintaining positive rates.
