340 2019 Universal registration document and annual financial report - BNP PARIBAS

5 risks and CaPital adequaCy Pillar 3

5

Credit risk

➤ TABLE 30: CREDIT RISK-WEIGHTED ASSETS MOVEMENTS BY KEY DRIVER (EU CR8)

In millions of euros

RWAs Capital Requirements

Total of which IRB

approach Total of which IRB

approach

31 December 2018 503,851 242,323 40,308 19,386

Asset size 27,869 15,787 2,230 1,263

Asset quality (15,738) (8,240) (1,259) (659)

Model update 4,397 4,397 352 352

Methodology and policy 3,361 - 269 -

Acquisitons and disposals (2,571) 6,478 (206) 518

Currency 3,127 1,661 250 133

Others (65) (2,854) (5) (228)

31 DECEMBER 2019 524,231 259,552 41,939 20,764

Credit risk-weighted assets decreased by EUR 20 billion in 2019, primarily as a result of the following:

■ an increase of EUR 28 billion in connection with business activity (net of securitisations), including an increase of EUR 12 billion in CIB, EUR 11 billion in International Financial Services and EUR 4 billion in Domestic Markets;

■ a EUR 16 billion improvement in asset quality with, in particular, an improvement in risk parameters;

■ an increase of EUR 4 billion relating to the updating of models;

■ an increase of EUR 3 billion relating to the implementation of the new IFRS 16 accounting standard starting from 1 January 2019;

■ EUR 3 billion related to perimeter effects;

■ an increase of EUR 3 billion due to currency effects, particularly with the appreciation of the U.S. dollar and pound sterling.

CREDIT RISK: INTERNAL RATINGS BASED APPROACH (IRBA)

The internal rating system developed by the Group covers the entire Bank. The IRBA framework, validated in December 2007, covers the portfolio described in Approaches used to calculate capital requirements in the section entitled Exposure to credit risk.

The Group has developed specific internal models adapted for the most common categories of exposure and clients in its loan portfolio. BNP Paribas bases these developments on internal data gathered over long periods. Each of these models is developed and maintained by a specialist team, in conjunction with relevant RISK and business line experts. Moreover, verification is performed to ensure compliance with the floors set by the regulation on these models. The Bank does not use models developed by external suppliers.

Counterparty rating (or the Probability of Default) and the Loss Given Default is determined either using purely statistical models for portfolios with the highest degree of granularity (loans to individuals or to very small enterprises) or a combination of models and expert judgement based on indicative values.

Loss Given Default is defined as the loss that the Bank would suffer in the event of the counterparty s default in times of economic downturn, as required by regulations. For each transaction, it is measured using

the recovery rate for a senior unsecured exposure to the counterparty, adjusted for any risk mitigation techniques (collaterals or guarantees). Amounts recoverable against these mitigants are estimated each year using conservative assumptions as well as haircuts calibrated to reflect economic downturn conditions.

The Bank models its own conversion factors on financing commitments by using internal default data. Conversion factors are used to measure the off-balance sheet exposure at risk in the event of a default. This parameter is assigned automatically depending on the transaction type for all portfolios and therefore, is not determined by the Credit Committees.

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, determining stage 1 and stage 2 impairment and for book analyses.