2018 REGISTRATION DOCUMENT AND ANNUAL FINANCIAL REPORT

2018 Registration document and annual fi nancial report - BNP PARIBAS 315

5RISKS AND CAPITAL ADEQUACY PILLAR 3

Capital management and capital adequacy

CAPITAL ADEQUACY AND CAPITAL PLANNING

SINGLE SUPERVISORY MECHANISM The Single Supervisory Mechanism (SSM) is the banking supervisory system for the euro zone. The SSM, together with the Single Resolution Mechanism (SRM) and the Deposit Guarantee Scheme, is one of the three pillars of the Banking Union.

The ECB thus became the direct prudential supervisor of BNP Paribas as of 4 November 2014. The ECB draws on the competent national supervisory authorities in fulfi lling this role.

CAPITAL ADEQUACY The BNP Paribas Group is required to comply with a range of regulations:

■ E uropean banking regulations under CRD IV , which also cover banking supervision;

■ regulation relating to fi nancial conglomerates in respect of additional supervision of its banking and insurance activities.

BNP Paribas insurance business is governed by Solvency II insurance regulations since 1 January 2016.

Requirements under banking regulations and supervision

With the application of Basel 3 regulation as of 1 January 2014, the minimum ratios requirement increases gradually until 2019.

With respect to Pillar 1, the Group is required to meet a minimum Common E quity Tier 1 (CET1) capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6%, and a minimum T otal capital ratio of 8%.

Additional Pillar 1 requirements known as buffers In addition to the minimum capital requirements regarding Pillar 1, since 1 January 2016, BNP Paribas will have to maintain additional CET1 capital buffers on a gradual basis:

■ the capital conservation buffer is equal to 2.5% of the risk-weighted assets, since 2019. The aim of this buffer is to absorb losses in a situation of intense economic stress;

■ the following three buffers were defi ned to limit systemic risk. Only the highest of these three buffers is applicable:

■ the buffer for global systemically important banks (G-SIBs) consists of a surcharge of CET1 capital defi ned by the Financial Stability Board based on the methodology developed by the Basel Committee, which evaluates the global systemic importance of banks. Global systemic importance is measured in terms of the impact of a bank s failure can have on the global fi nancial system and the wider economy.

T he measurement approach of the global systemic importance is indicator-based. The selected indicators refl ect the size of banks, their interconnectedness, the lack of readily available substitutes or fi nancial institution infrastructure for the services they provide, their global cross-jurisdictional activity and their complexity. The

methodology is described in the document published in July 2013 by the Basel Committee, entitled Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement (BCBS 255).

In April 2018, BNP Paribas published the values of the G-SIBs indicators as at 31 December 2017. Details of the values of G-SIBs indicators can be found in the Conferences and Publications section of the I nvestor R elations website www.invest.bnpparibas.com.

The Financial Stability Board published the list of systemically important banks for 2018 on 16 November 2018. As in 2017, BNP Paribas is classified in group 2 which sets the additional Common Equity Tier 1 capital requirement at 1.5% in 2019.

The next update of the Group indicators is due for publication at the end of April 2019,

■ the buffer for domestic systemically important institutions (D-SIBs) aims to strengthen the capital requirements for institutions whose failure would have an impact on the national economy. The D-SIBs buffer for BNP Paribas is set at 1.5% in 2019,

■ the systemic risk buffer aims to limit systemic or macroprudential non-cyclical risks in the long term. This buffer is not signifi cant for the Group;

■ the countercyclical capital buffer is defi ned as a surcharge of CET1 capital whose purpose is to adjust over time to increase the capital requirements in periods when credit growth is accelerating and reduce them in slower periods. A countercyclical buffer rate may be activated in each country by a discretionary decision from the appointed national authority. In view of the buffer rates by country applicable for 2018, the BNP Paribas countercyclical capital buffer is 0.07% at 31 December 2018. The Group s countercyclical capital buffer will gradually increase with the implementation of rates in certain countries to reach 0.16% by the end of 2019 and 0.17% at 1 January 2020 (see Appendix 3 Countercyclical Capital Buffer).

Pillar 2 requirements With respect to supervision, the second Pillar of the Basel Agreement provides that the supervisor shall determine whether the policies, strategies, procedures and arrangements implemented by the Group on the one hand, and the capital held on the other hand, are adequate for risk management and risk coverage purposes. This evaluation exercise by the supervisors to determine the adequacy of mechanisms and capital with respect to bank risk levels is designated in the regulations under the term SREP (Supervisory Review and Evaluation Process).

ICAAP (Internal Capital Adequacy Assessment Process) is the process by which institutions assess the adequacy of their capital with their internal measurements of the levels of risk generated by their usual activities. ICAAP is used by the supervisory authorities for the annual SREP.

Within the BNP Paribas Group, the ICAAP is based on two key principles: the verifi cation that the level of available capital is adequate with respect to the capital requirements, and the forward-looking capital planning.