2020 Universal registration document and annual financial report - BNP PARIBAS464
5 risks and CaPital adequaCy Pillar 3
5
Operational risk
CAPITAL REQUIREMENT CALCULATION
Operational risk-weighted assets are calculated by multiplying the capital requirement by 12.5.
APPROACH ADOPTED BNP Paribas uses a hybrid approach combining the advanced measurement approach (AMA), standardised approach, and basic indicator approach.
In terms of net banking income, most legal entities within the Group s prudential scope of consolidation use the advanced measurement approach. This includes most Retail Banking activities in the domestic networks and Private Banking, as well as Corporate and Institutional Banking.
Advanced measurement approach (AMA)
Under the AMA for calculating capital requirements, the Bank uses an internal operational risk model based on the four components required by the regulations, namely:
■ internal historical loss data from operational risk;
■ external loss data from operational risk;
■ environmental and internal control factors;
■ analysis of forward-looking scenarios, known as potential incidents in the BNP Paribas Group.
BNP Paribas internal model in place since 2008 includes the following features:
■ an aggregate annual loss distribution, meaning that the frequency and severity of losses from operational risks are modelled using an actuarial approach and according to distributions calibrated with available data;
■ it uses historical data as well as prospective scenarios to calculate capital requirements, with a predominance for scenarios because they can be shaped to reflect severe and less frequent operational risks;
■ the model is faithful to its operational risk input data, so that its results can be used easily by each of the Group s business lines. Most of the assumptions are therefore included in the data themselves;
■ it is prudent in its capital requirement calculations: the input data are thoroughly reviewed, and any supplemental risk data are added if needed to cover all relevant operational risks within the Group.
Regulatory AMA capital requirements are calculated as VaR (Value at Risk), or the maximum potential loss over one year, at a 99.9% confidence level to calculate regulatory capital requirements. Capital requirements are calculated at an aggregate level using risk data from all Group entities in the AMA perimeter, then allocated to business lines and individual legal entities.
Since the second quarter of 2018, risk-weighted assets have been raised to the level of the standardised approach within the AMA scope.
Fixed-parameter approaches
BNP Paribas uses fixed-parameter approaches (basic or standard) to calculate the capital requirements for entities in the Group s prudential consolidation scope that are not covered by the internal model:
■ basic approach: the capital requirement is calculated as the average over the past three years of a financial aggregate based on net banking income (the exposure indicator) multiplied by a unique alpha parameter set by the regulator (15% weighting);
■ standardised approach: the capital requirement is calculated as the average over the past three years of a financial aggregate based on net banking income multiplied by factors set by the regulator and corresponding to each business category. For the purposes of this calculation, all the Group s business lines are broken down into eight regulatory business categories.
