2018 Registration document and annual fi nancial report - BNP PARIBAS 287
5RISKS AND CAPITAL ADEQUACY PILLAR 3
5
Annual risk survey
RISK FACTORS
The principal risks to which the Group is exposed are presented below. They may be measured through risk-weighted assets or other indicia to the extent risk-weighted assets are not relevant.
Credit risk: Credit risk is defi ned as the probability of a borrower or counterparty defaulting on its obligations to the Bank. Probability of default along with the recovery rate of the loan or debt in the event of default are essential elements in assessing credit quality. The Bank s risk- weighted assets subject to this type of risk amounted to EUR 504 billion at 31 December 2018. In accordance with the EBA recommendations, this category of risk also includes risks on equity investments, as well as those related to insurance activities. See section 5.4.
Operational risk: Operational risk is the risk of loss resulting from failed or inadequate internal processes (particularly those involving personnel and information systems) or external events, whether deliberate, accidental or natural (fl oods, fi res, earthquakes, terrorist attacks, etc.). Operational risks include fraud, human resources risks, legal and reputational risks, non-compliance risks, tax risks, information systems risks, risk of providing inadequate fi nancial services (conduct risk), risk of failure of operational processes including credit processes, or from the use of a model (model risk), as well as potential fi nancial consequences related to reputation risk management. The Bank s risk-weighted assets subject to this type of risk amounted to EUR 73 billion at 31 December 2018. See section 5.9.
Counterparty risk: Counterparty risk arises from the Bank s credit risk in the specifi c context of market transactions, investments, and/ or settlements. The amount of this risk varies over time depending on fl uctuations in market parameters affecting the potential future value of the transactions concerned. The Bank s risk-weighted assets subject to this type of risk amounted to EUR 27 billion at 31 December 2018. See section 5.6.
Market risk: Market risk is the risk of loss of value caused by an unfavorable trend in prices or market parameters. Market parameters include, but are not limited to, exchange rates, prices of securities and commodities (whether the price is directly quoted or obtained by reference to a comparable asset), the price of derivatives on an established market and all benchmarks that can be derived from market quotations such as interest rates, credit spreads, volatility or implicit correlations or other similar parameters. The Bank s risk-weighted assets subject to this type of risk amounted to EUR 20 billion at 31 December 2018. See section 5.7.
Securitization risk: Securitization is a transaction or arrangement by which the credit risk associated with a liability or set of liabilities is subdivided into tranches. Any commitment made under a securitization structure (including derivatives and liquidity lines) is considered to be a securitization. The bulk of these commitments are in the prudential banking portfolio. The Bank s risk-weighted assets subject to this type of risk amounted to EUR 7 billion at 31 December 2018. See section 5.5.
Risks related to deferred taxes and certain holdings in credit or financial institutions: amounts below the prudential capital deduction thresholds generate risk-weighted assets amounting to EUR 17 billion at 31 December 2018.
Liquidity risk: Liquidity risk is the risk that the Bank will not be able to honor its commitments or unwind or offset a position due to market conditions or specifi c factors within a specifi ed period of time and at a reasonable cost. It refl ects the risk of not being able to cope with net cash outfl ows, including collateral requirements, over short-term to long-term horizons. The Group s specifi c risk can be assessed through its short-term liquidity ratio (Liquidity Coverage Ratio LCR), which analyzes the hedging of net cash outfl ows during a thirty -day stress period. See section 5.8.
More generally, the risks to which the Group is exposed may arise from a number of factors related, among others, to changes in its macroeconomic, competitive, market and regulatory environment or the implementation of its strategy, its business or its operations.
These risk factors are described in detail below.
RISKS RELATED TO THE MACROECONOMIC ENVIRONMENT Adverse economic and fi nancial conditions have in the past had and may in the future have an impact on the Bank and the markets in which it operates.
The Bank s business is sensitive to changes in the fi nancial markets and more generally to economic conditions in France, Europe and the rest of the world. A deterioration in economic conditions in the markets where the Bank operates could have some or all of the following impacts:
■ adverse economic conditions could affect the business and operations of the Bank s customers, reducing credit demand and trading volume and resulting in an increased rate of default on loans and receivables;
■ a decline in market prices of bonds, shares and commodities could impact many of the businesses of the Bank, including in particular trading, Investment Banking and asset management revenues;
■ macroeconomic policies adopted in response to actual or anticipated economic conditions could have unintended effects, and are likely to impact market parameters such as interest rates and foreign exchange rates, which in turn could affect the Bank s businesses that are most exposed to market risk;
■ perceived favorable economic conditions generally or in specific business sectors could result in asset price bubbles, which could in turn exacerbate the impact of corrections when conditions become less favorable;
