2018 Registration document and annual fi nancial report - BNP PARIBAS294

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Annual risk survey

Adjustments to the carrying value of the Bank s securities and derivatives portfolios and the Bank s own debt could have an impact on its net income and shareholders equity.

The carrying value of the Bank s securities and derivatives portfolios and certain other assets, as well as its own debt, in its balance sheet is adjusted as of each fi nancial statement date. Most of the adjustments are made on the basis of changes in fair value of its assets or its debt during an accounting period, with the changes recorded either in the income statement or directly in shareholders equity. Changes that are recorded in the income statement, to the extent not offset by opposite changes in the value of other assets, affect its consolidated revenues and, as a result, its net income. All fair value adjustments affect shareholders equity and, as a result, its capital adequacy ratios. The fact that fair value adjustments are recorded in one accounting period does not mean that further adjustments will not be needed in subsequent periods.

The credit ratings of the Bank may be downgraded, which would weigh on its profi tability.

Credit ratings have a significant impact on the Bank s liquidity. A downgrade in the Bank s credit rating could affect its liquidity and competitive position. It could also increase the Bank s borrowing costs, limit access to the capital markets or trigger additional obligations under its covered bonds or under certain bilateral provisions in some trading, derivative or collateralized fi nancing contacts.

In addition, the Bank s cost of obtaining long-term unsecured funding from market investors is also directly related to its credit spreads, which in turn depend to a certain extent on its credit ratings. Increases in credit spreads can signifi cantly increase the Bank s cost of funding. Changes in credit spreads are continuous, market-driven, and subject at times to unpredictable and highly volatile movements. Credit spreads are also infl uenced by market perceptions of the Bank s creditworthiness. Furthermore, credit spreads may be infl uenced by movements in the cost to purchasers of credit default swaps referenced to the Bank s debt obligations, which are infl uenced both by the credit quality of those obligations, and by a number of market factors that are beyond the control of the Group.

Intense competition by banking and non-banking operators could adversely affect the Bank s revenues and profi tability.

Competition is intense in all of the Bank s primary business areas in France and the other countries in which it conducts a substantial portion of its business, including other European countries and the United States. Competition in the banking industry could intensify as a result of consolidation in the fi nancial services area or as a result of the presence of new players in the payment and the fi nancing services area or the development of crowdfunding platforms. In particular, competitors subject to less extensive regulatory requirements or to less strict capital requirements (e.g., debt funds, shadow banks), or benefi ting from economies of scale, data synergies or technological innovation (e.g., internet and mobile operators, digital platforms, fi ntechs), could be more competitive by offering lower prices or more innovative services. In addition, new payment systems and crypto-currencies, such as Bitcoin, and new technology that facilitate transaction processes, such as

blockchain, have developed in recent years. While it is diffi cult to predict the effects of these emerging technologies as well as any applicable regulations, their use could nevertheless reduce the Bank s market share or secure investments that otherwise would have used technology used by more established fi nancial institutions, such as the Bank. If the Bank is unable to respond to the competitive environment in France or in its other major markets by offering attractive, innovative and profi table product and service solutions, it may lose market share in key areas of its business or incur losses on some or all of its activities. In addition, downturns in the economies of its principal markets could add to the competitive pressure, through, for example, increased price pressure and lower business volumes for the Bank and its competitors. It is also possible that the imposition of more stringent requirements (particularly capital requirements and business restrictions) on large or systemically signifi cant fi nancial institutions, could lead to distortions in competition in a manner adverse to large private-sector institutions such as the Bank.

RISKS RELATED TO THE BANK S OPERATIONS The Bank s risk management policies, procedures and methods may leave it exposed to unidentifi ed or unanticipated risks, which could lead to material losses.

The Bank has devoted significant resources to developing its risk management policies, procedures and assessment methods and intends to continue to do so in the future. Nonetheless, the Bank s risk management techniques and strategies may not be fully effective in mitigating its risk exposure in all economic and market environments or against all types of risk, particularly risks that the Bank may have failed to identify or anticipate. The Bank s ability to assess the creditworthiness of its customers or to estimate the values of its assets may be impaired if, as a result of market turmoil such as that experienced in recent years, the models and approaches it uses become less predictive of future behavior, valuations, assumptions or estimates. Some of the Bank s qualitative tools and metrics for managing risk are based on its use of observed historical market behavior. The Bank applies statistical and other tools to these observations to arrive at quantifi cations of its risk exposures. The process the Bank uses to estimate losses inherent in its credit exposure or estimate the value of certain assets requires diffi cult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of its borrowers to repay their loans or impact the value of assets, which may, during periods of market disruption, be incapable of accurate estimation and, in turn, impact the reliability of the process. These tools and metrics may fail to predict future risk exposures, e.g., if the Bank does not anticipate or correctly evaluate certain factors in its statistical models, or upon the occurrence of an event deemed extremely unlikely by the tools and metrics. This would limit the Bank s ability to manage its risks. The Bank s losses could therefore be signifi cantly greater than the historical measures indicate. In addition, the Bank s quantifi ed modelling does not take all risks into account. Its more qualitative approach to managing certain risks could prove insuffi cient, exposing it to material unanticipated losses.