2018 Registration document and annual fi nancial report - BNP PARIBAS284
5 RISKS AND CAPITAL ADEQUACY PILLAR 3
5
Annual risk survey
In this context, the following risk categories can be identifi ed:
Risks of fi nancial instability due to the conduct of monetary policies Two risks should be emphasised: a sharp increase in interest rates and the current very accommodating monetary policy being maintained for too long.
On the one hand, the continued tightening of monetary policy in the United States (started in 2015) and the less-accommodating monetary policy in the euro zone (reduction in assets purchases started in January 2018, with an end in December 2018) involve risks of fi nancial turbulence and economic slowdown more pronounced than expected. The risk of a not adequately controlled rise in long-term interest rates may in particular be emphasised, under the scenario of an unexpected increase in infl ation or an unanticipated tightening of monetary policies. If this risk materialises, it could have negative consequences on the asset markets, particularly those for which risk premiums are extremely low compared to their historic average, following a decade of accommodating monetary policies (credit to non-investment grade corporates or countries, certain sectors of the equity and bond markets, etc.) as well as on certain interest rate-sensitive sectors.
On the other hand, despite the upturn since mid-2016, interest rates remain low, which may encourage excessive risk-taking among some fi nancial market participants: lengthening maturities of fi nancings and assets held, less stringent credit policy, and an increase in leveraged fi nancings. Some of these participants (insurance companies, pension funds, asset managers, etc.) have an increasingly systemic dimension and in the event of market turbulence (linked for example to a sharp rise in interest rates and/or a sharp price correction) they could be brought to unwind large positions in a relatively weak market liquidity.
Systemic risks related to increased debt Macro-economically, the impact of an interest rate increase could be signifi cant for countries with high public and/or private debt-to-GDP. This is particularly the case for certain European countries (in particular Greece, Italy, and Portugal), which are posting public debt-to-GDP ratios often above 100% but also for emerging countries.
Between 2008 and 2018, these latter recorded a marked increase in their debt, including foreign currency debt owed to foreign creditors. The private sector was the main source of the increase in this debt, but also the public sector to a lesser extent, particularly in Africa. These countries are particularly vulnerable to the prospect of a tightening in monetary policies in the advanced economies. Capital outfl ows could weigh on exchange rates, increase the costs of servicing that debt, import infl ation, and cause the emerging countries central banks to tighten their credit conditions. This would bring about a reduction in forecast economic growth, possible downgrades of sovereign ratings, and an increase in risks for the banks. While the exposure of the BNP Paribas Group to emerging countries is limited, the vulnerability of these economies may generate disruptions in the global fi nancial system that could affect the Group and potentially alter its results.
It should be noted that debt-related risk could materialise, not only in the event of a sharp rise in interest rates, but also with any negative growth shocks.
Laws and regulations applicable to fi nancial institutions
Recent and future changes in the laws and regulations applicable to fi nancial institutions may have a signifi cant impact on the Bank. Measures that were recently adopted or which are (or whose application measures are) still in draft format, that have or are likely to have an impact on the Bank notably include:
■ regulations governing capital: CRD 4/CRR, the international standard for Total Loss Absorbing Capacity (TLAC) and the Bank s designation as a fi nancial institution that is of systemic importance by the Financial Stability Board;
■ the structural reforms comprising the French banking law of 26 July 2013 requiring that banks create subsidiaries for or segregate speculative proprietary operations from their traditional r etail b anking activities, the Volcker rule in the US, which restricts proprietary transactions, sponsorship and investment in private equity funds and hedge funds by US and foreign banks;
■ the European Single Supervisory Mechanism and the ordinance of 6 November 2014;
■ the Directive of 16 April 2014 related to deposit guarantee systems and its delegation and implementing Decrees, the Directive of 15 May 2014 establishing a Bank Recovery and Resolution framework, the Single Resolution Mechanism establishing the Single Resolution Council and the Single Resolution Fund;
■ the Final Rule by the US Federal Reserve imposing tighter prudential rules on the US transactions of large foreign banks, notably the obligation to create a separate intermediary holding company in the US (capitalised and subject to regulation) to house their US subsidiaries;
■ the new rules for the regulation of over- the- counter derivative activities pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, notably margin requirements for non-cleared derivative products and the security derivatives traded by swap dealers, major swap participants, security-based swap dealers and major security-based swap participants, and the rules of the US Securities and Exchange Commission which require the registration of banks and major swap participants active on derivatives markets as well as transparency and reporting on derivative transactions;
■ the new MiFID and MiFIR, and European regulations governing the clearing of certain over-the-counter derivative products by centralised counterparties and the disclosure of securities fi nancing transactions to centralised bodies;
■ The General Data Protection Regulation (GDPR) came into force on 25 May 2018. This regulation aims to move the European data confidentiality environment forward and improve personal data protection within the European Union). Businesses run the risk of severe penalties if they do not comply with the standards set by the GDPR. This regulation applies to all banks providing services to European citizens;
