2018 Registration document and annual fi nancial report - BNP PARIBAS330

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Risk management [Audited]

The global scenario is made up of regional and national scenarios (euro zone, France, Italy, Belgium, Spain, Germany, United Kingdom, Poland, Turkey, United States, Japan, China, India, Russia, etc.) consistent with each other.

Adverse scenario

An adverse scenario describes one or several potential shock s to the economic and fi nancial environment i.e. the materialisation of one or several risks to the baseline scenario over the projection horizon. An adverse scenario is thus always designed in relation to a baseline scenario, and the shocks associated with the adverse scenario are translated in the set of macroeconomic and fi nancial variables listed above as deviations from their value in the baseline scenario. The adverse scenario is constructed by RISK with the benefi t of the expertise of the same team from Group functions or business lines used for the baseline scenario.

Construction of scenarios

Adverse scenarios are revised quarterly by RISK for a review of the Bank s risk appetite metrics and credit provision calculations within the framework of IFRS 9.

They are also approved (together with the baseline scenario) by Group Executive Management in June and September as part of the Group s

budget process. For the other two quarterly exercises in March and December, scenarios are approved jointly by the Group Chief Risk Offi cer and the Group Chief Financial Offi cer.

The scenarios are then used to calculate expected losses (or P&L impact in the case of market risks) over the year for all Group portfolios:

■ for portfolios exposed to credit or counterparty risk and for the equity portfolio of the banking book: this calculation measures the impact of the scenario on the cost of risk and risk-weighted assets due to the deterioration of the portfolio quality resulting from the adverse scenario, or adverse moves in equity prices. Credit risk stress tests are performed on the Bank s entire portfolio for all regions and all prudential portfolios, namely Retail, Corporates and Financial Institutions;

■ for market portfolios: the changes in value and their P&L impact are calculated by simulating a one-time shock, which is consistent with the overall scenario.

The above calculations and related methodologies for stress tests on credit and market risks are coordinated centrally at Group level by STFS team. They also involve various teams of experts at Group and territory s levels in their implementation and design.