2018 Registration document and annual fi nancial report - BNP PARIBAS 291

5RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Annual risk survey

■ restrictions or prohibitions on certain types of fi nancial products or activities, enhanced recovery and resolution regimes, in particular the Bank Recovery and Resolution Directive of 15 May 2014 (the BRRD ), which strengthens powers to prevent and resolve banking crises in order to ensure that losses are borne largely by the creditors and shareholders of the banks and in order to keep the costs incurred by taxpayers to a minimum;

■ the establishment of the national resolution funds by the BRRD and the creation of the Single Resolution Board (the SRB ) by the European Parliament and Council of the European Union in a resolution dated 15 July 2014, which can initiate resolution proceedings for banking institutions such as the Bank, and the Single Resolution Fund (the SRF ), whose fi nancing is provided for by the Bank (up to its annual contribution) and can be signifi cant;

■ the establishment of national deposit guarantee schemes and a proposed European deposit guarantee scheme or deposit insurance which will gradually cover all or part of the guarantee schemes of participating countries;

■ increased internal control and reporting requirements with respect to certain activities;

■ more stringent governance and conduct of business rules and restrictions and increased taxes on employee compensation over specifi ed levels;

■ measures to improve the transparency, effi ciency and integrity of fi nancial markets and in particular the regulation of high frequency trading, more extensive market abuse regulations, increased regulation of certain types of fi nancial products including mandatory reporting of derivative and securities fi nancing transactions, requirements either to mandatorily clear, or otherwise mitigate risks in relation to, over-the- counter derivative transactions (including through posting of collateral in respect of non-centrally cleared derivatives);

■ the taxation of fi nancial transactions;

■ enhanced privacy and cybersecurity requirements; and

■ strengthening the powers of supervisory bodies, such as the French Prudential Supervision and Resolution Authority (the ACPR ) and the creation of new authorities, including the adoption of the Single Resolution Mechanism in October 2013, which placed the Bank under the direct supervision of the ECB as of November 2014.

It is impossible to predict what additional measures will be adopted and, given the complexity and continuing uncertainty of a certain number of these measures, to determine their impact on the Bank. The cumulative effect of these measures, whether already adopted or in the process of being adopted, has been and could continue to be a decrease in the Bank s ability to allocate its capital and capital resources to fi nancing, limit its ability to diversify risks, reduce the availability of certain fi nancing and liquidity resources, increase the cost of fi nancing, increase the cost or reduce the demand for the products and services offered by the Bank, require the Bank to proceed with internal reorganizations, structural changes or reallocations, affect the ability of the Bank to carry on certain activities or to attract and/or retain and, more generally, affect

its competitiveness and profi tability, which could have an impact on its profi tability, fi nancial condition and operating results.

The Bank could become subject to a resolution proceeding.

The BRRD and the Ordinance of 20 August 2015 confer upon the ACPR or the SRB the power to commence resolution proceedings for a banking institution, such as the Bank, with a view to ensure the continuity of critical functions, to avoid the risks of contagion and to recapitalize or restore the viability of the institution.

These powers are to be implemented so that, subject to certain exceptions, losses are borne fi rst by shareholders, then by holders of additional capital instruments qualifying as tier 1 and tier 2 (such as subordinated bonds), then by the holders of non preferred senior debt and fi nally by the holders of senior preferred debt, all in accordance with the order of their claims in normal insolvency proceedings.

Resolution authorities have broad powers to implement resolution measures with respect to institutions and groups subject to resolution proceedings, which may include (without limitation): the total or partial sale of the institution s business to a third party or a bridge institution, the separation of assets, the replacement or substitution of the institution as obligor in respect of debt instruments, the full or partial write-down of capital instruments, the dilution of capital instruments through the issuance of new equity, the full or partial write-down or conversion into equity of debt instruments, modifi cations to the terms of debt instruments (including altering the maturity and/or the amount of interest payable and/or imposing a temporary suspension on payments), discontinuing the listing and admission to trading of fi nancial instruments, the dismissal of managers or the appointment of a special manager (administrateur spécial).

Certain powers, including the full or partial write-down of capital instruments, the dilution of capital instruments through the issuance of new equity, the full or partial write-down or conversion into equity of additional capital instruments qualifying as tier 1 and tier 2 (such as subordinated bonds), can also be exercised as a precautionary measure, outside of resolution proceedings and/or pursuant to the European Commission s State Aid framework if the institution requires exceptional public fi nancial support.

The implementation of these tools and powers with respect to the Bank may result in signifi cant structural changes to the Group (including as a result of asset or business sales or the creation of bridge institutions) and in a partial or total write-down, modifi cation or variation of claims of shareholders and creditors. Such powers may also result, after any transfer of all or part of the Bank s business or separation of any of its assets, in the holders of securities (even in the absence of any such write-down or conversion) being left as the creditors of the Bank whose remaining business or assets are insuffi cient to support the claims of all or any of the creditors of the Bank.

The Bank is subject to extensive and evolving regulatory regimes in the jurisdictions in which it operates.