3272019 Universal registration document and annual financial report - BNP PARIBAS
5risks and CaPital adequaCy Pillar 3
5
Credit risk
Confirmation or amendments to the probability of default parameters and GRR applicable to each transaction are reviewed at least once a year as part of the loan approval process or annual credit review. These are based on the combined expertise of business line staff and, as a second look, the RISK representatives (who have the final say in case of disagreement). It uses appropriate tools including analysis aids and credit scoring systems. The decision to use these tools and the choice of technique depends on the nature of the risk.
For retail counterparties, the system is also based on three parameters: Probability of Default (PD), the Global Recovery Rate (GRR) and the Credit Conversion Factor (CCF). On the other hand, rating methods are applied automatically to determine the loan parameters.
Internal estimates of risk parameters are used in the Bank s day-to- day management in line with regulation recommendations. Thus apart from calculating capital requirements, they are used for example when setting delegated limits, granting new loans or reviewing existing loans to measure profitability, determine stage 1 and stage 2 impairment and for book analyses.
➤ TABLE 25: INDICATIVE MAPPING OF INTERNAL COUNTERPARTY RATING WITH AGENCY RATING SCALE AND AVERAGE EXPECTED PD
Internal rating
BNP Paribas
LT Issuer/ Unsecured
issuer s ratings
S&P/Fitch Average
expected PD
Investment Grade
1+ AAA 0.01%
1 AA+ 0.01%
1- AA 0.01%
2+ AA- 0.02%
2 A+/A 0.03%
2- A- 0.04%
3+/3/3- BBB+ 0.06% to 0.10%
4+/4/4- BBB 0.13% to 0.21%
5+/5/5- BBB- 0.26% to 0.48%
Non Investment Grade
6+ BB+ 0.69%
6/6- BB 1.00% to 1.46%
7+/7 BB- 2.11% to 3.07%
7- B+ 4.01%
8+/8/8- B 5.23% to 8.06%
9+/9/9- B- 9.53% to 13.32%
10+ CCC 15.75%
10 CC 18.62%
10- C 21.81%
Default 11 D 100.00%
12 D 100.00%
The Group has developed an indicative equivalence between the Bank s internal ratings and the long-term issuer ratings assigned by the major rating agencies. However, the Bank has a much broader clientele than just those counterparties rated by an external rating agency. An indicative equivalence is not relevant in retail banking. It is used when the internal ratings are assigned or reviewed in order to identify any differences between the Bank s assessment of a borrower s probability of default and that of one or more of the rating agencies. However, the internal ratings do not aim to reproduce or even approximate the external ratings. There are significant variances in both directions within the portfolio. Some counterparties rated 6 or 7 by BNP Paribas could be considered Investment Grade by the rating agencies.
For further details, see the sections Internal rating system sovereign, financial institution, corporate and specialised financing portfolios and Internal rating system specific to retail customers.
CREDIT RISK STRESS TESTING Quantitative models have been developed and are used to connect credit risk and rating migration parameters with macroeconomic and financial variables projected in stress testing scenarios (see section 5.3 Stress testing), for historical data as well as the relevant forecast period.
The quality of the methods used is guaranteed by:
■ strict governance in terms of the separation of duties and responsibilities;
■ a review of existing systems (models, methodologies, tools) by an independent entity;
■ periodic evaluation of the effectiveness and pertinence of the system as a whole.
This governance is based on internal policies and procedures, the supervision of the Credit Risk Stress Testing Committees by business line and the integration of the stress tests within the risk management system.
There is a Group-level credit-risk stress testing policy, approved by the Capital Committee in July 2013. It is used for different types of stress testing (regulatory, periodic and ad hoc).
The central stress testing framework is consistent with the structure defined in the EBA guidelines for European stress tests:
■ it is based on the parameters used to calculate capital requirements (regulatory EAD, PD and LGD);
■ the expected loss conditional to the macroeconomy is used as a measure of the cost of risk resulting from new defaults;
■ the stressed cost of risk is supplemented with impacts on stage 1 and 2 provisions and provisions on the outstanding non-performing loans;
■ the regulatory capital stress testing is performed on the basis of rating migrations, default events, and the stressed regulatory PD used in calculating regulatory capital requirements.
