2812019 Universal registration document and annual financial report - BNP PARIBAS

5risks and CaPital adequaCy Pillar 3

5

Annual risk survey

derivative financial instruments used for hedging purposes amounted to EUR 582.2 billion and EUR 14.1 billion, respectively, at 31 December 2019. Most of the adjustments are made on the basis of changes in fair value of the BNP Paribas Group s assets or debt during an accounting period, with the changes recorded either in the income statement or directly in shareholders equity. Changes that are recorded in the income statement, to the extent not offset by opposite changes in the value of other assets, affect the BNP Paribas Group s consolidated revenues and, as a result, its net income. All fair value adjustments affect shareholders equity and, as a result, the BNP Paribas Group s capital adequacy ratios. The fact that fair value adjustments are recorded in one accounting period does not mean that further adjustments will not be needed in subsequent periods.

4. LIQUIDITY AND FUNDING RISK Liquidity risk is the risk that the BNP Paribas Group will not be able to honour its commitments or unwind or offset a position due to market conditions or specific factors within a specified period of time and at a reasonable cost. It reflects the risk of not being able to cope with net cash outflows, including collateral requirements, over short-term to long- term horizons. The BNP Paribas Group s specific risk can be assessed through its short-term liquidity ratio (Liquidity Coverage Ratio LCR), which analyses the hedging of net cash outflows during a thirty-day stress period. The monthly average in 2019 of the BNP Paribas Group s LCR was 123%, representing a liquidity surplus of EUR 58 billion compared to regulatory requirements. The liquidity reserve was EUR 309 billion at the end of 2019.

See Tables 92: Breakdown of global liquidity reserve (counterbalancing capacity) and 93: Short-term liquidity ratio (LCR) Itemised in chapter 5.8 Liquidity risk.

4.1 The BNP Paribas Group s access to and cost of funding could be adversely affected by a resurgence of financial crises, worsening economic conditions, rating downgrades, increases in sovereign credit spreads or other factors

The financial crisis, the euro zone sovereign debt crisis as well as the general macroeconomic environment have at times adversely affected the availability and cost of funding for European banks in recent years. This was due to several factors, including a sharp increase in the perception of bank credit risk due to exposure to sovereign debt in particular, credit rating downgrades of sovereigns and of banks, and debt market speculation. Many European banks, including the BNP Paribas Group, at various points experienced restricted access to wholesale debt markets and to the interbank market, as well as a general increase in their cost of funding. Accordingly, reliance on direct borrowing from the European Central Bank ( ECB ) at times increased substantially. If such adverse credit market conditions were to reappear in the event of prolonged stagnation of growth, deflation, resurgence of the financial crisis, another sovereign debt crisis or new forms of financial crises, factors relating to the financial industry in general or to the BNP Paribas Group in particular, the effect on the liquidity of the European financial sector in general and the BNP Paribas Group in particular could be materially adverse and have

a negative impact on the BNP Paribas Group s results of operations and financial condition.

See Wholesale funding and liquidity reserve monitoring indicators, in chapter 5.8 in particular tables 88: Breakdown of the wholesale funding by currency; 89: Breakdown of the Group s medium- and long-term (MLT) wholesale funding; 90: Trends in Group MLT wholesale funding; and 91: MLT secured wholesale funding.

4.2 Protracted market declines can reduce the BNP Paribas Group s liquidity, making it harder to sell assets and possibly leading to material losses. Accordingly, the BNP Paribas Group must ensure that its assets and liabilities properly match in order to avoid exposure to losses

In some of the BNP Paribas Group s businesses, particularly Global Markets (which represented 12% of the BNP Paribas Group s revenue in 2019) and Asset/Liability Management, protracted market movements, particularly asset price declines, can reduce the level of activity in the market or reduce market liquidity. These developments can lead to material losses if the BNP Paribas Group cannot close out deteriorating positions in a timely way. This is particularly true for assets that are intrinsically illiquid. Assets that are not traded on stock exchanges or other public trading markets, such as certain derivative contracts between financial institutions, may have values that the BNP Paribas Group calculates using models rather than publicly-quoted prices. Monitoring the deterioration of prices of assets like these is difficult and could lead to significant unanticipated losses (see chapter 5.8, paragraph Stress tests and liquidity reserve).

The BNP Paribas Group is exposed to the risk that the maturity, interest rate or currencies of its assets might not match those of its liabilities. The timing of payments on certain of the BNP Paribas Group s assets is uncertain, and if the BNP Paribas Group receives lower revenues than expected at a given time, it might require additional market funding in order to meet its obligations on its liabilities. While the BNP Paribas Group imposes strict limits on the gaps between its assets and its liabilities as part of its risk management procedures, it cannot be certain that these limits will be fully effective to eliminate potential losses arising from asset and liability mismatches.

See paragraphs Foreign exchange risk and Interest risk in section 5.7 and paragraph Business lines internal monitoring indicators in section 5.8, as well as Tables 94: Contractual maturities of the prudential balance sheet, 95: Contractual maturities of capital instruments and medium- and long-term debt securities in the prudential perimeter and 96: Economic maturities of capital instruments (prudential perimeter).

4.3 Any downgrade of the Group s companies credit ratings could weigh heavily on the profitability of the Group

Credit ratings have a significant impact on the BNP Paribas Group s liquidity. On 5 April 2019, Standard & Poor s revised the long-term rating of BNP Paribas SA s deposits and senior preferred debt from A to A+,