3212019 Universal registration document and annual financial report - BNP PARIBAS

5risks and CaPital adequaCy Pillar 3

5

Risk management [Audited]

To ensure dynamic risk supervision and management, the Group has implemented a comprehensive stress testing framework.

STRESS TESTING FRAMEWORK The stress testing framework forms an integral part of the risk management and financial monitoring system and is used with a threefold objective of forward-looking risk management, planning of regulatory resources and liquidity requirements, and optimisation of the deployment of these resources within the Group, mainly through the Group s and its main entities ICAAP and ILAAP processes.

Different types of stress tests

There are two types of stress tests:

■ regulatory stress tests:

These involve primarily the stress tests requested by the European Banking Authority, the European Central Banks, or any other supervisory authority.

The ECB conducted liquidity stress tests on one hundred three European banks in 2019. This exercise consisted of a sensitivity analysis to assess changes in the banks net liquidity position in different impact scenarios that may arise in the event of the bank experiencing a liquidity crisis. The shocks applied to assets and liabilities were defined using observed liquidity crises that have impacted banks in Europe and were calibrated for different levels of severity. This liquidity stress test showed the comfortable Group s liquidity position.

In 2018, the EBA and the ECB had conducted EU-wide stress tests of the forty-eight largest European banks. All banks were required to apply certain macroeconomic scenarios and methodological assumptions for comparison purposes. A scenario of severe macroeconomic stress over a period of three consecutive years (the adverse scenario ) was used to test the impact on exposure to credit, market, operational and revenue (rates and commission) risk. This was the first European regulatory year completed under the new IFRS 9 accounting standard, enabling its potential impact in the event of a major macroeconomic crisis to be analysed.

This stress test demonstrated the Group s ability to withstand the scenario proposed by the European Systemic Risk Board (ESRB) as part of the test. As a reminder, the impact of this major stress scenario on BNP Paribas capital consisted in reducing the full CET1 ratio by 288 basis points compared with the level at 31 December 2017, restated for calculation changes in the first half of 2018(1), versus an average reduction of -385 basis points across all of the forty-eight European banks tested;

■ internal stress tests:

■ stress tests dedicated to risk anticipation: they contribute to the forward-looking risk management, in particular of credit, market, counterparty, interest rates in the banking book, operational, activity and liquidity risks. The results of the transverse stress tests are used, among other purposes, to formulate the Bank s risk appetite

and periodically measure its risk profile. They are periodically submitted to Group Executive Management as well as the Board s Internal Control, Risk Management and Compliance Committee (CCIRC) through the quarterly Group risk dashboard. Moreover, ad hoc stress testing is performed, when appropriate, within Risk & Development Committees, portfolio reviews or Country Strategic Committees to identify and assess areas of vulnerability within the Group s portfolios,

■ stress tests for the budget process: they contribute to three-year capital planning. Stress tests are carried out annually as part of the budget process and are included in the ICAAP and the ILAAP. They are reviewed at divisional and business line level before being consolidated at Group level to provide a comprehensive view of the impact on the Bank s capital, liquidity and earnings.

The purpose of stress testing in the budget process is to assess the impact of an adverse macroeconomic scenario on the Group and its activities. These stress tests are part of the yearly budget process which is run on the basis of baseline and adverse scenarios.

The impact of the adverse scenario is measured on profil and loss (revenues, cost of risk, etc.), balance-sheet, risk-weighted assets, and capital.

The calculated final output is a Group stressed solvency ratio, as well as possible adjustment measures. The scenarios used, the outcomes of the stress tests and the proposed possible adjustment measures (such as reducing exposures to a sub-segment or changes in funding or liquidity policies, etc.) are included in the budget synthesis report presented to the Group Executive Management at the end of the budget process. In addition, in the Group s ICAAP, its solvency can be analysed in adverse scenarios other than an adverse budget scenario, defined by risk topics occasionally identified by the Group,

■ reverse stress tests: they were conducted as part of the Bank s recovery and resolution plan and ICAAP. Reverse stress tests consist of identifying scenarios likely to result in a drop in the Bank s solvency ratios to below levels set in advance in line with the methods of use in question. These exercises enable any areas where the Bank is fragile in terms of changes in certain risk factors to be detected and facilitate in-depth analyses of the remedial actions that could be implemented by business lines or Group-wide.

Governance and implementation

This framework is based on a well-defined governance, with responsibilities shared between the Group and operational entities in order to encourage operational integration and relevance. Since 2017, the Group has set up a Stress Testing and Extended Planning (STEP) programme serving both the Group and its subsidiaries and business lines.

(1) Relating to the entry into force of IFRS 9, to the deduction from CET1 capital of irrevocable payment commitments (IPC) and to risk-weighted assets associated with operational risk in advanced measurement approach which have been raised to the level of the standardised approach.

STRESS TESTING