322 2019 Universal registration document and annual financial report - BNP PARIBAS

5 risks and CaPital adequaCy Pillar 3

5

Risk management [Audited]

The aim of the STEP programme is continue to respond effectively to the various regulatory stress tests, such as the EBA and ECB stress test carried out in 2018, and to develop internal stress test practices required for proper risk management and Group resource planning.

Group Finance, RISK and ALM Treasury have created a shared team Stress Testing and Financial Synthesis ( STFS ), responsible for implementing the STEP programme and its deployment across the Group s entities and activities.

The STFS team is responsible in particular for:

■ the definition and the implementation of the Group s target structure in terms of stress testing while covering the associated organisational issues, modelisation, IT systems and governance;

■ the performance of all of the Group s stress testing exercises, relying in particular on existing teams within RISK and Group Finance;

■ the support of the stress test initiatives of the Group s business lines and legal entities in order to ensure overall consistency and streamline procedures;

■ the management of the Group s financial synthesis and its adaptation to the challenges of SREP.

Stress test methodologies are tailored to the main categories of risk and subject to independent review.

Stress tests may be run at Group, business line or portfolio level, dedicated to one or more risk types and on a more or less large number of variables depending on the pursued objective. Where appropriate, the results of quantitative models may be adjusted on the basis of expert judgement.

Since its creation, the Group s stress testing framework has evolved continuously in order to integrate the most recent developments in stress tests, whether in terms of methodologies or improved operational integration in the Group s management processes. The stress test framework by type of risks is detailed in sections 5.4 Credit risk, 5.6 Counterparty credit risk and 5.7 Market risk.

INTERNAL STRESS TEST SCENARIO DEFINITION In stress testing exercises, it is common practice to distinguish baseline scenario and adverse scenarios. A macroeconomic scenario is typically a set of macroeconomic and macrofinancial variables (GDP and its components, inflation, employment and unemployment, interest and exchange rates, stock prices, commodity prices, etc.) values projected over a given future period of time.

Baseline scenario

The baseline scenario is considered as the most likely scenario over the projection horizon. The baseline scenario is constructed by Group Economic Research in collaboration with various functions or business lines possessing a specific expertise, in particular:

■ Group ALM Treasury for interest rates;

■ Wealth Management for equity indices;

■ BNP Paribas Real Estate regarding commercial real estate;

■ local economists when regional expertise is required;

■ RISK for coordination and overall consistency of the scenario.

The global scenario is made up of regional and national scenarios (euro zone, France, Italy, Belgium, Spain, Germany, United Kingdom, Poland, Turkey, United States, Japan, China, India, Russia, etc.) consistent with each other.

Adverse scenario

An adverse scenario describes one or several potential shocks to the economic and financial environment i.e. the materialisation of one or several risks to the baseline scenario over the projection horizon. An adverse scenario is thus always designed in relation to a baseline scenario, and the shocks associated with the adverse scenario are translated in the set of macroeconomic and financial variables listed above as deviations from their value in the baseline scenario. The adverse scenario is constructed by RISK with the benefit of the expertise of the same team from Group functions or business lines used for the baseline scenario.

Construction of scenarios

Adverse scenarios are revised quarterly by RISK for a review of the Bank s risk appetite metrics and credit provision calculations within the framework of IFRS 9.

They are approved (together with the baseline scenario) by the Group Executive Management in June and September as part of the Group s budget process. For the other two quarterly exercises in March and December, scenarios are approved jointly by the Group Chief Risk Officer and the Group Chief Financial Officer.

The scenarios are then used to calculate expected losses (or profit and loss impact in the case of market risks) over the year for all Group portfolios:

■ for portfolios exposed to credit or counterparty risk and for the equity portfolio of the banking book: this calculation measures the impact of the scenario on the cost of risk and risk-weighted assets due to the deterioration of the portfolio quality resulting from the macroeconomic scenario, or adverse moves in equity prices. Credit risk stress tests are performed on the Bank s entire portfolio for all regions and all prudential portfolios, namely Retail, Corporates and Institutions;

■ for market portfolios: the changes in value and their profit and loss impact are calculated by simulating a one-time shock, which is consistent with the overall scenario.

The above calculations and related methodologies for stress tests on credit and market risks are coordinated centrally at Group level by STFS team. They also involve various teams of experts at Group and territory s levels in their implementation and design.

Lastly, in an adverse budget scenario, risks appertaining to the Group and its business activities and not forming part of the adverse macroeconomic scenario are added. They are identified and quantified either by the Group s businesses or centrally for those likely to impact the Group as a whole.