414 2019 Universal registration document and annual financial report - BNP PARIBAS

5 risks and CaPital adequaCy Pillar 3

5

Market risk

➤ TABLE 86: SENSITIVITY OF REVENUES TO GLOBAL INTEREST RATE RISK BASED ON A 50 BASIS POINT INCREASE OR DECREASE IN THE INTEREST RATES [Audited]

Sensivity of 2019 revenues In millions of euros

For +50bp shock For -50bp shock

EUR USD Other

currencies Total EUR USD Other

currencies Total

Year 1 (259) (25) 13 (270) 275 19 (32) 263

Year 2 166 13 37 216 (220) (11) (57) (287)

Year 3 512 44 57 614 (474) (37) (76) (587)

Sensivity of 2018 revenues In millions of euros

For +50bp shock For -50bp shock

EUR USD Other

currencies Total EUR USD Other

currencies Total

Year 1 125 41 19 185 (110) (45) (27) (182)

Year 2 453 13 44 510 (433) (17) (48) (498)

Year 3 604 38 56 698 (735) (44) (57) (836)

Sensitivity of the value of the net assets of the banking intermediation activity

As the assets and liabilities of the Group s banking intermediation business are not intended to be sold, they are not recognised or managed on the basis of their theoretical economic value measured by discounting future cash flows. Similarly, the theoretical economic value of the net assets does not affect the Group s capital.

However, pursuant to the regulatory requirements and calculation methods laid down by the European Banking Authority (EBA), the ratios of sensitivity to variations of +/-200 basis points (+/-2%) in interest rates, of the theoretical economic value of the net assets of the intermediation business in relation to Tier 1 and Tier 2 capital are regularly calculated. These ratios are compared to the 20% threshold used by the supervisor to identify situations where interest rate risk in the banking book may be material. At end-2019, the ratio was -0.4% for a 200-basis-point decrease and -8.6% for a 200-basis-point increase. These values are both well below the materiality threshold of 20%. The regulatory floors as defined in the EBA s Guidelines on the management of interest rate risk arising from non-trading book activities are applied to interest rate shocks.

HEDGING OF INTEREST RATE AND FOREIGN EXCHANGE RISKS Hedges initiated by the Group consist mainly of interest rate or currency hedges using derivative financial instruments (swaps, options and forwards).

Depending on the hedging objective, derivative financial instruments used for hedging purposes are qualified either as fair value hedges, cash flow hedges, or hedges of net investments in foreign operations. Each hedging relationship is formally documented at inception. The documentation describes the hedging strategy, identifies the hedged item and the hedging instrument, and the nature of the hedged risk; and describes the methodology used to test the expected (prospective) and actual (retrospective) effectiveness of the hedge.

Global interest rate risk

The Bank s strategy for managing global interest rate risk is mainly based on closely monitoring the sensitivity of the Bank s net income to changes in interest rates, factoring in all interest rate risks. The aim is to ensure the stability and regularity of the interest margin. This monitoring requires an extremely accurate assessment of the risks incurred so that the Bank can determine the hedging strategy, after taking into account the effects of netting the different types of risk. These hedging strategies are defined and implemented by entity and by currency.

The hedges can comprise swaps and options and are typically accounted for as fair value hedges or cash flow hedges. They may also take the form of government securities and are classified on an accounting basis as Financial assets at amortised cost or Financial assets at fair value through equity .

Accordingly, amid uncertainties related to global trade, in August, low prospects of inflation and growth pushed long-term interest rates to historic lows below those reached in 2016, and led to changes in the European Central Bank s monetary policy, with asset purchases, targeted longer-term refinancing operations (TLTRO), a drop in the deposit facility rate, and a change in the remuneration of liquidity surpluses.

In the United States of America, where interest rates were higher, the same changes were observed.

As interest rates continue to fall, early redemptions and rate renegotiations have nevertheless remained low in domestic markets. The savings structure continued to be distorted in favour of non-interest bearing current accounts, making it necessary to regularly revisit the investment horizon of these accounts.

Structural foreign exchange risk [Audited]

Currency hedges are contracted by the ALM Treasury in relation to the Group s investments in foreign currencies and its future foreign currency revenues. Each hedging relationship is formally documented at inception. The documentation describes the hedging strategy, identifies the hedged item and the hedging instrument, and the nature of the hedged risk and