400 2019 Universal registration document and annual financial report - BNP PARIBAS

5 risks and CaPital adequaCy Pillar 3

5

Market risk

➤ TABLE 78: MARKET RISK-WEIGHTED ASSETS MOVEMENTS BY KEY DRIVER (EU MR2-B)

In millions of euros VaR SVaR IRC(*) CRM(**) Standardised

approach Total RWAs Total capital

requirements

1 31 December 2018 5,488 9,323 2,436 479 2,222 19,948 1,596

2.a Asset size 282 3,162 364 (29) (617) 3,162 253

2.b Asset quality (344) (857) (361) 44 (13) (1,531) (122)

3 Model update (752) (1,643) (3) - - (2,398) (192)

4 Methodology and policy - - - - - - -

5 Acquisitons and disposals (107) (250) (54) - (411) (33)

6 Currency - - - - - - -

7 Other 77 264 2 0 184 527 42

8 31 DECEMBER 2019 4,644 9,999 2,384 494 1,776 19,296 1,544

(*) Incremental Risk Charge. (**) Comprehensive Risk Measure.

The change in market risk-weighted assets in 2019 is explained mainly by:

■ a EUR 3.2 billion increase related to business activity;

■ a -EUR 1.5 billion decrease caused by the improved risk parameters;

■ a -EUR 2.4 billion decrease following the updating of the models;

■ a -EUR 0.4 billion decrease following the termination of the proprietary trading activities of Opera Trading Capital.

MARKET RISK RELATED TO TRADING ACTIVITIES

INTRODUCTION Market risk arises mainly from trading activities carried out within Corporate and Institutional Banking (CIB), mainly within Global Markets and encompasses different risk factors defined as follows:

■ interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates;

■ foreign exchange risk is the risk that the value of an instrument will fluctuate due to changes in foreign exchange rates;

■ equity risk arises from changes in the market prices and volatilities of equity shares and/or equity indices;

■ commodities risk arises from changes in the market prices and volatilities of commodities and/or commodity indices;

■ credit spread risk arises from the change in the credit quality of an issuer and is reflected in changes in the cost of purchasing protection on that issuer;

■ option products carry by nature volatility and correlation risks, for which risk parameters can be derived from option market prices observed in an active market.

Trading activities at BNP Paribas are directly related to economic relations with business line customers, or indirectly as part of market- making activities. BNP Paribas s proprietary trading activities, transferred to the Opera Trading Capital subsidiary in mid-2015, were shut during the first quarter of 2019.

MARKET RISK MANAGEMENT ORGANISATION The market risk management system aims to track and control market risks as well as control financial instrument valuation whilst ensuring that the control functions remain totally independent from the business lines.

Within RISK, three departments are responsible for monitoring market risk:

■ Global Markets RISK (GM RISK) covers Global Markets activities;

■ Enterprise Risk Architecture (ERA ALMT RISK) covers ALM-Treasury activities;

■ International Retail Banking RISK (IRB RISK) covers International Retail Banking activities.