2018 Registration document and annual fi nancial report - BNP PARIBAS 329
5RISKS AND CAPITAL ADEQUACY PILLAR 3
5
Risk management [Audited]
■ i nternal stress tests:
■ stress tests dedicated to risk anticipation: they contribute to the forward-looking management of credit, market, counterparty, operating, activity and liquidity risks. The results of the transverse stress tests (carried out by central functions and the STFS team) are used, among other purposes, to formulate the Bank s risk appetite and periodically measure its risk profi le, and are periodically submitted to Group Executive Management as well as the Board s Internal Control, Risk Management and Compliance Committee (CCIRC) through the quarterly Group risk dashboard. Moreover, ad hoc stress testing is performed, when appropriate, within Risk Policy Committees, portfolio reviews or Country Strategic Committees to identify and assess areas of vulnerability within the Group s portfolios,
■ stress tests for the budget process: they contribute to three-year capital planning. Stress tests are carried out annually as part of the budget process and are included in the ICAAP and the ILAAP. They are reviewed at divisional and business line level before being consolidated at Group level to provide a comprehensive view of the impact on the Bank s capital and earnings.
The purpose of stress testing in the budget process is to assess the impact of an adverse macroeconomic scenario on the Group and its activities. These stress tests are part of the yearly budget process which is run on the basis of baseline and adverse scenarios.
The impact of the adverse scenario is measured on P&L (revenues, cost of risk, etc.), balance-sheet, risk-weighted assets, and capital. The main risk appetite metrics are calculated within the framework of the adverse scenario in order to ensure compliance with the limits set.
The expected fi nal output of stress testing exercises is a Group stressed solvency ratio, as well as possible adjustment measures. The scenarios used, the outcomes of the stress tests and the proposed possible adjustment measures (such as reducing exposures to a sub-segment or changes in funding or liquidity policies, etc.) are included in the budget synthesis report presented to the Group Executive Management at the end of the budget process,
■ reverse stress tests: they were conducted as part of the Bank s recovery and resolution plan and ICAAP. Reverse stress tests consist of identifying scenarios likely to result in a drop in the Bank s solvency ratios to below levels set in advance in line with the methods of use in question. These exercises enable any areas where the Bank is fragile in terms of changes in certain risk factors to be detected and facilitate in-depth analyses of the remedial actions that could be implemented by business lines or Group-wide.
Governance and implementation
This framework is based on a well-defined governance, with clear responsibilities, shared between the Group and operational entities in order to encourage operational integration and relevance. In February 2017, the Group decided to launch a Stress Testing and Extended Planning (STEP) programme serving both the Group and its subsidiaries and business lines. The aim of the STEP programme is continue to respond effectively to the various regulatory stress tests, such as the EBA and ECB stress test carried out in 2018, and to develop internal stress test practices required for proper risk management and Group resource planning.
Group Finance, RISK and ALM & Treasury have decided to create a shared team Stress Testing and Financial Synthesis ( STFS ), responsible for implementing the STEP programme and its deployment across the Group s entities and activities.
The STFS team is responsible in particular for:
■ defi ning and implementing the Group s target structure in terms of stress testing while covering the associated organisational issues, IT systems and governance;
■ performing all of the Group s stress testing exercises, relying in particular on existing teams within RISK and Group Finance;
■ supporting the stress test initiatives of the Group s business lines and legal entities in order to ensure overall consistency and streamline procedures;
■ managing the Group s fi nancial synthesis and steering its adaptation to the challenges of SREP.
Stress test methodologies are tailored to the main categories of risk and subject to independent review.
Stress tests may be run at Group, business line or portfolio level, dedicated to one or more risk types and on a more or less large number of variables depending on the pursued objective. Where appropriate, the results of quantitative models may be adjusted on the basis of expert judgement.
Since its creation, the Group s stress testing framework has evolved continuously in order to integrate the most recent developments in stress tests, whether in terms of methodologies or improved operational integration in the Group s management processes. The stress test framework by type of risks is detailed in sections 5.4 Credit risk, 5.6 Counterparty credit risk and 5.7 Market risk.
INTERNAL STRESS TEST SCENARIO DEFINITION In stress testing exercises, it is common practice to distinguish baseline scenario and adverse scenarios. A macroeconomic scenario is typically a set of macroeconomic and macrofi nancial variables (GDP and its components, infl ation, unemployment, interest and exchange rates, stock prices, commodity prices, etc.) values projected over a given future period of time.
Baseline scenario
The baseline scenario is considered as the most likely scenario over the projection horizon. The baseline scenario is constructed by Group Economic Research in collaboration with various functions or business lines possessing a specifi c expertise, in particular:
■ Group ALM Treasury (interest rates);
■ Wealth Management (equity indices);
■ BNPP Real Estate (commercial real estate);
■ local economists (regional expertise);
■ RISK (coordination and overall consistency of the scenario).
