2018 Registration document and annual fi nancial report - BNP PARIBAS 289

5RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Annual risk survey

interest rates, has resulted and may continue to result in a decrease in the average interest rate of the Bank s portfolio of loans thereby causing a decline in the Bank s net interest income from its lending activities. Moreover, an environment of persistently low interest rates can also have the effect of fl attening the yield curve in the market more generally, which could reduce the premium generated by the Bank from its funding activities. A fl attening yield curve can also infl uence fi nancial institutions to engage in riskier activities in an effort to earn the desired level of returns, which can increase overall market risk and volatility. Low interest rates may also negatively affect the profi tability of the Bank s insurance activities, which may not be able to generate suffi cient returns to be competitive with other investment products. Low interest rates may also adversely affect commissions charged by the Bank s asset management subsidiaries on money market and other fi xed income products. A reduction in credit spreads and decline in Retail Banking income resulting from lower portfolio interest rates may adversely affect the profi tability of the Bank s Retail Banking operations.

On the other hand, the end of a period of prolonged low interest rates, in particular due to tightening monetary policy, also carries risks. In this respect, the US Federal Reserve is currently tightening its monetary policy and the ECB announced the end of its quantitative easing policy in December 2018, which could result in an increase in interest rates in the future. If market interest rates were to rise, a portfolio featuring signifi cant amounts of lower interest loans and fi xed income assets would be expected to decline in value. If the Bank s hedging strategies are ineffective or provide only a partial hedge against such a change in value, the Bank could incur losses. Any sharper or more rapid than expected tightening could have a negative impact on the economic recovery. On the lending side, it could in particular cause stress in loan and bond portfolios, possibly leading to an increase in non-performing exposures and defaults. More generally, the ending of accommodative monetary policies (including liquidity infusions from central bank asset purchases) may lead to severe corrections in certain markets or asset classes (e.g., non-investment grade corporate and sovereign borrowers, certain sectors of equities and real estate) that particularly benefi tted (including from very low risk premia as compared to historical averages) from the prolonged low interest rate and high liquidity environment, and such corrections could potentially be contagious to fi nancial markets generally, including through substantially increased volatility.

RISKS RELATED TO THE MARKET ENVIRONMENT Signifi cant interest rate changes could adversely affect the Bank s revenues or profi tability.

The amount of net interest income earned by the Bank during any given period signifi cantly affects its overall revenues and profi tability for that period. Interest rates are highly sensitive to many factors beyond the Bank s control, such as the rate of infl ation, country-specifi c monetary

policies and certain decisions concerning regulatory capital. Changes in market interest rates could affect the interest rates charged on interest- earning assets differently than the interest rates paid on interest-bearing liabilities. Any adverse change in the yield curve could cause a decline in net interest income from the Bank s lending activities. In addition, increases in the interest rates at which the Bank s short-term funding is available and maturity mismatches may adversely affect its profi tability.

The soundness and conduct of other fi nancial institutions and market participants could adversely affect the Bank.

The Bank s ability to engage in fi nancing, investment and derivative transactions could be adversely affected by the soundness of other fi nancial institutions or market participants. Financial institutions are interrelated as a result of trading, clearing, counterparty, funding or other relationships. As a result, defaults, or even rumors or questions about, one or more fi nancial services institutions, or the fi nancial services industry generally, may lead to market-wide liquidity problems and could lead to further losses or defaults. The Bank has exposure to many counterparties in the fi nancial industry, directly and indirectly, including clearing houses, brokers and dealers, commercial banks, investment banks, mutual and alternative investment funds, and other institutional clients with which it regularly executes transactions. The Bank may also be exposed to risks related to the increasing involvement in the fi nancial sector of players and the introduction of new types of transactions subject to little or no regulation (e.g., unregulated funds, trading venues or crowdfunding platforms). Credit and counterparty risks could be exacerbated if the collateral held by the Bank cannot be realized upon or is liquidated at prices not suffi cient to recover the full amount of the loan or derivative exposure due to the Bank or in case of a failure of a signifi cant fi nancial market participant such as a central counterparty. It is worth noting in this respect that regulatory changes requiring mandatory clearing of standardized over-the-counter (OTC) derivatives through central counterparties have resulted in an increase of the exposure of fi nancial market participants to such central counterparties.

In addition, fraud or misconduct by fi nancial market participants can have a material adverse effect on fi nancial institutions due in particular to the interrelated nature of the fi nancial markets. An example is the fraud perpetrated by Bernard Madoff that came to light in 2008, as a result of which numerous fi nancial institutions globally, including the Bank, announced losses or exposure to losses in substantial amounts. The Bank remains the subject of various claims in connection with the Madoff matter; see note 8.b Contingent liabilities: legal proceedings and arbitration to its consolidated fi nancial statements as of and for the period ended 31 December 2018.

There can be no assurance that any losses resulting from the risks summarized above will not materially and adversely affect the Bank s results of operations.

The Bank may incur signifi cant losses on its trading and investment activities due to market fl uctuations and volatility.