2018 Registration document and annual fi nancial report - BNP PARIBAS 279

5RISKS AND CAPITAL ADEQUACY PILLAR 3

5

The purpose of Pillar 3 market discipline, is to complement the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) with a set of disclosures completing the usual fi nancial disclosures.

This chapter presents the information relative to the BNP Paribas Group s risks and in this respect meets:

■ the requirements of part 8 of Regulation (EU) No. 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment fi rms applicable to BNP Paribas on a consolidated basis (see article 13);

■ the accounting standards requirements relating to the nature and the extent of the risks. Some information required by accounting standards IFRS 7, IFRS 4 and IAS 1 is included in this chapter and covered by the opinion of the Statutory Auditors on the consolidated fi nancial statements. This information is identifi ed by the mention [Audited] and must be read as being part of the notes to the consolidated fi nancial statements;

■ the Guidelines on disclosure requirements under Part Eight of Regulation (EU) No. 575/2013 in addition to the Guidelines on LCR disclosure proposed by the European Banking Authority in order improve the comparability of the fi nancial information published by fi nancial institutions in respect of Pillar 3.

The Basel current measures (known as Basel 3), approved in November 2010, strengthen the ability of banks to withstand economic and fi nancial shocks of all kinds by introducing a series of regulatory provisions. The content of this reform was transposed into European law in Directive 2013/36/EU (CRD 4) and Regulation (EU) No. 575/2013 of 26 June 2013 (CRR), which together constitute the corpus of texts known as CRD IV .

All of these new requirements are phased-in over a fi ve-year period from 1 January 2014 to 1 January 2019, transitioning from phased-in ratios to fully loaded ratios.

The regulatory framework of Basel 3 had the following main impacts:

■ strengthened solvency:

The Basel 3 rules harmonise the defi nition of capital and strengthen the ability of fi nancial institutions to absorb losses.

A detailed description of the composition of regulatory capital is given under Regulatory capital in section 5.2. The table in Appendix 2 is presented in accordance with Council Implementing Regulation (EU) No. 1423/2013 of 20 December 2013.

Rules on calculating risk-weighted assets were also revised to strengthen related capital requirements.

Strengthened solvency is implemented through the Single Supervisory Mechanism (SSM) overseen by the ECB as of 1 November 2014 and application of the European Banking Authority (EBA) Supervisory Review and Evaluation Process (SREP) guidelines.

The BNP Paribas Group, identifi ed as a fi nancial conglomerate , is subject to additional supervision. As a financial conglomerate, the Group s own funds cover the capital requirements for banking activities as well as insurance activities (see Capital adequacy and capital planning in section 5.2).

■ introduction of a leverage ratio:

It is planned to introduce a leverage ratio primarily to act as a supplementary measure to the risk-based capital requirements (backstop principle). Banks have been required to publish their leverage ratios since 1 January 2015.

The Group s leverage ratio as at 31 December 2018 is presented in section 5.2 Capital adequacy and capital planning.

■ liquidity management:

The implementation of CRD IV on liquidity with the introduction of a short-term liquidity ratio (Liquidity Coverage Ratio LCR) and a long term liquidity ratio (Net Stable Funding Ratio NSFR) is presented in section 5.8 Liquidity risk.

The minimum liquidity coverage ratio has been set at 100% of total net cash outfl ows during the 30-day stress period.

■ introduction of the new bank resolution scheme:

The new bank resolution scheme applies as of 1 January 2016, together with the defi nition of the TLAC (Total Loss Absorbing Capacity) ratio applicable to global systemically important banks (G-SIBs), in accordance with the recommendations of the Financial Stability Board approved during the G20 Antalya summit in November 2015. These requirements have been in force since 1 January 2019, and shall be stricter from 1 January 2022 (see Capital adequacy and capital planning in section 5.2).

Furthermore, two recent proposals can be noted:

■ on 23 November 2016, the European Commission proposed a text as an amendment to Regulation (EU) No. 575/2013 of 26 June 2013 (CRR), Directive 2013/36/EU (CRD 4), Regulation (EU) No. 806/2014 (Single Resolution Mechanism Regulation), and Directive 2014/59/EU (Bank Recovery and Resolution Directive). These proposals concern in particular the level of the leverage ratio, the methods for calculating the net stable funding ratio (NSFR) and the TLAC requirements for G-SIBs. At the end of 2018 an agreement was reached between the European Commission, the European Council and the European Parliament (Trilogue procedure), as a prerequisite to voting and publication in the OJEU (Official Journal of the European Union), expected in the fi rst half of 2019;

■ on 7 December 2017, the Group of Governors and Heads of Supervision (GHOS) approved the reforms finalising the Basel 3 regulatory framework. They consist of a revision of the framework for credit risk, credit valuation adjustment (CVA) risk, and operational risk, the procedures for calculating the leverage ratio and its requirement level for G-SIBs, and the introduction of a fl oor for the calculation of risk- weighted assets when an internal method is used.

The Basel Committee plans an application as of 1 January 2022. To be applicable, these reforms must be transposed into European law.

In chapter 5 the fi gures presented may not seem to add up in certain columns or lines due to their rounding off.