2018 Registration document and annual fi nancial report - BNP PARIBAS288

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Annual risk survey

■ a signifi cant economic disruption (such as the global fi nancial crisis of 2008 or the European sovereign debt crisis of 2011) could have a severe impact on all of the Bank s activities, particularly if the disruption is characterized by an absence of market liquidity that makes it diffi cult to sell certain categories of assets at their estimated market value or at all;

■ a signifi cant deterioration of market and economic conditions resulting from, among other things, from adverse political and geopolitical events such as natural disasters, societal unrest, geopolitical tensions (in particular protectionist measures), acts of terrorism, cyber-attacks, military confl icts or threats thereof and related risks could affect the operating environment for fi nancial institutions episodically or for extended periods.

European markets may be affected by a number of factors in 2019, including continuing uncertainty resulting from the decision of the United Kingdom to leave the European Union and uncertain political and economic conditions in certain large European countries. Markets in the United States may be affected by factors, such as trade policy or a tendency towards political stalemate, which has affected credit and currency markets globally. Asian markets could be impacted by factors such as slower than expected economic growth rates in certain countries in the region.

Share prices have recently experienced signifi cant volatility, which may occur again. Credit markets and the value of fi xed income assets could be adversely affected if interest rates were to rise as central banks continue to scale back the extraordinary support measures put in place in response to recent adverse economic conditions. The price of oil has been particularly volatile in recent months, and could be impacted by unpredictable geopolitical factors in regions such as the Middle East and Russia.

More generally, increased volatility of fi nancial markets could adversely affect the Bank s trading and investment positions in the debt, currency, commodity and equity markets, as well as its positions in other investments. Severe market disruptions and extreme market volatility have occurred in recent years and may occur again in the future, which could result in signifi cant losses for the Bank. Such losses may extend to a broad range of trading and hedging products, including swaps, forward and future contracts, options and structured products. The volatility of fi nancial markets makes it diffi cult to predict trends and implement effective trading strategies.

It is diffi cult to predict when economic or market downturns will occur, and which markets will be most signifi cantly impacted. If economic or market conditions in France or elsewhere in Europe, or global markets more generally, were to deteriorate or become more volatile, the Bank s operations could be disrupted, and its business, results of operations and fi nancial condition could be adversely affected.

Given the global scope of its activities, the Bank may be vulnerable to certain political, macroeconomic or fi nancial risks in the countries and regions where it operates.

The Bank is subject to country risk, meaning the risk that economic, fi nancial, political or social conditions in a given foreign country in which it

operates could affect its business and results. The Bank monitors country risk and takes it into account in the fair value adjustments and cost of risk recorded in its fi nancial statements. However, a signifi cant change in political or macroeconomic environments may require it to record additional charges or to incur losses beyond the amounts previously written down in its fi nancial statements. In addition, factors specifi c to a country or region in which the Bank operates could make it diffi cult for it to carry out its business and lead to losses or impairment of assets.

As of 31 December 2018, 32% of the Bank s commercial lending portfolio was comprised of loans to borrowers in France, 14% by loans to borrowers in Belgium and Luxembourg, 10% by loans to borrowers in Italy, 19% by loans to borrowers in other European countries, 13% by loans to borrowers in North America and 6% by loans to borrowers in Asia. Adverse conditions that particularly affect these countries and regions would have a particularly signifi cant impact on the Bank. In addition, the Group has signifi cant exposures in countries outside the OECD, which are subject to risks that include political instability, unpredictable regulation and taxation, expropriation and other risks that are less present in more developed economies.

The Bank s access to and cost of funding could be adversely affected by a resurgence of fi nancial crises, worsening economic conditions, rating downgrades, increases in credit spreads or other factors.

The fi nancial crisis, the euro zone sovereign debt crisis as well as the general macroeconomic environment have at times adversely affected the availability and cost of funding for European banks in recent years. This was due to several factors, including a sharp increase in the perception of bank credit risk due to exposure to sovereign debt in particular, credit rating downgrades of sovereigns and of banks, and debt market speculation. Many European banks, including the Bank, at various points experienced restricted access to wholesale debt markets and to the interbank market, as well as a general increase in their cost of funding. Accordingly, reliance on direct borrowing from the ECB at times increased substantially. If such adverse credit market conditions were to reappear in the event of prolonged stagnation of growth, defl ation, resurgence of the fi nancial crisis, the sovereign debt crisis or new forms of fi nancial crises, factors relating to the fi nancial industry in general or to the Bank in particular, the effect on the liquidity of the European fi nancial sector in general and the Bank in particular could be materially adverse and have a negative impact on the Bank s results of operations and fi nancial condition.

The prolonged low interest rate environment carries inherent systemic risks, and an exit from such environment also carries risks.

Since the 2008-2009 financial crisis, global markets have been characterized by an extended period of low interest rates. If the low interest rate environment continues, the Bank s profi tability may be affected. During such periods, interest rate spreads tend to tighten, and the Bank may be unable to lower interest rates on deposits suffi ciently to offset reduced income from lending at lower interest rates. In addition, the Bank has been facing and may continue to face an increase in early repayment and refi nancing of mortgages and other fi xed-rate consumer and corporate loans as clients take advantage of lower borrowing costs. This, along with the issuance of new loans at the low prevailing market