2018 Registration document and annual fi nancial report - BNP PARIBAS318
5 RISKS AND CAPITAL ADEQUACY PILLAR 3
5
Capital management and capital adequacy
Compliance with the regulation on the additional supervision of fi nancial conglomerates
As a bancassurer, the BNP Paribas Group is also subject to additional supervision as a fi nancial conglomerate, pursuant to European Directive 2002/87/EU, supplemented by Delegated Regulation 342/2014 of the European Commission and implemented into French law by the Order of 3 November 2014.
The financial conglomerates directive has established additional prudential supervision, added to the rules existing in the banking and insurance sectors, because it has introduced additional constraints on capital adequacy, the monitoring of large exposures, and intragroup transactions.
A fi nancial conglomerate is required to meet additional capital adequacy requirements on a consolidated basis. The purpose is to require suffi cient capital to cover both banking sector and insurance sector risks, while eliminating multiple gearing.
The capital surplus or shortfall results from the difference between the fi nancial conglomerate s equity capital and the solvency requirements applicable to the banking and insurance industries:
■ the financial conglomerate s capital is determined based on the sector s solvency rules (CRR/CRD 4 for the banking sector and Solvency II for the insurance sector);
■ the requirements for the fi nancial conglomerate are determined on the basis of banking sector requirements, calculated according to CRR/CRD 4 rules, including all capital buffers resulting from SREP 2017 applicable in 2018, and on the basis of the solvency capital requirement (SCR) for the insurance sector, calculated in accordance with the Solvency II regulation.
In calculating the financial conglomerate s capital adequacy, the requirements and deductions of insurance entities are treated in compliance with Solvency II rules as a replacement of the CRR/CRD 4 solvency rules. The latter consist primarily of a 370% weighting of investments in equities treated according to the simple weighting method (see section 5.4, Credit risk: equities under the simple weighting method).
This adequacy is calculated taking transitional measures into account.
Governance for the prudential supervision of fi nancial conglomerates falls to the Capital Committee, which meets quarterly under the Chairmanship of the Chief Operating Offi cer.
As at 31 December 2018, BNP Paribas Group, as a fi nancial conglomerate, had capital of EUR 104.3 million compared to a total requirement of EUR 88.0 million, which represents a capital surplus of EUR 16.3 million.
RECOVERY AND RESOLUTION Following the 2008/2009 financial crisis, international banking regulatory bodies adopted a series of regulations and directives based on the recommendations of the Financial Stability Board to facilitate the authorities management of crises involving fi nancial institutions and limit the impact of a potential collapse on the economy and public fi nances.
These rules started to be implemented in 2010, although some are still being amended. They provide for:
■ powers and instruments for the supervisory authorities to allow for better anticipation and oversight of the recovery of banks in diffi culty, particularly by means of recovery plans;
■ powers and instruments for the resolution authorities in order to implement orderly resolution of a bank that would not have been able to recover by itself and would be placed in resolution. This is based among other things on the resolution documents required from banks;
■ the addition of further regulatory requirements for banks. These requirements which overlap quite largely aim to ensure a suffi cient quantity of liabilities able to absorb losses or be converted into equity. In particular, they consist of:
■ a TLAC (Total Loss Absorbing Capacity) minimum ratio for global systemically important banks (G-SIBs),
■ an MREL (Minimum Requirement for own funds and Eligible Liabilities) applicable to all European institutions;
■ new bail-in rules for banks, with a review of the ranking of creditors including the creation of a new category of TLAC eligible debt ( non preferred senior), plus the creation of a resolution fund fi nanced by the banks, with the aim of avoiding any recourse to public assistance.
The recommendations of the Financial Stability Board were transposed into French banking law in July 2013, introducing in particular the obligation to create recovery and resolution plans, and resolution powers for the ACPR (Autorité de contrôle prudentiel et de résolution).
On a European level, the BRRD (Bank Recovery and Resolution Directive) was passed in 2014 and has been transposed into the law of all European Union Member States. This directive, as well as the Single Resolution Mechanism (SRM) regulation of 2014 and various additional delegated regulations, form all of the current regulations governing the recovery and resolution of European fi nancial institutions. In November 2016, the European Commission proposed a series of amendments to BRRD, CRD 4 and CRR, which are expected to be voted on in 2019.
Recovery Plan
The recovery plan, prepared at Group level, describes the possible recovery options if the Group were to fi nd itself in a distressed situation. It also contains information needed by the authorities to understand the Group s operations, resilience and capacity to absorb losses.
BNP Paribas submitted its updated Recovery Plan to its supervisor, the ECB in September 2018. The Single Resolution Board (SRB) and other authorities can obtain the Recovery Plan from the ECB.
Prepared in accordance with the Financial Stability Board s recommendations, and pursuant to the provisions of the French Monetary and Financial Code, this Recovery Plan was submitted to the Board of Director s Internal Control, Risk Management and Compliance Committee (CCIRC) for review and then to the Board of directors for approval (see chapter 2 Corporate governance and Internal control).
