2018 Registration document and annual fi nancial report - BNP PARIBAS 333

5RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Credit risk

CREDIT RISK MANAGEMENT POLICY [Audited]

CREDIT POLICIES The Bank s lending activities are governed by the Global Credit Policy. It applies to all Group activities that generate credit or counterparty risk. The Global Credit Policy provides general principles (including the risk assessment and decision-making process, adherence to the highest standards of compliance and ethics) applicable to all credit risk, as well as specifi c principles applicable to country risk, economic sector risks, clients selection and the transaction structures. It is supplemented by specifi c policies tailored to each type of business or counterparty.

The Global Credit Policy is updated in line with developments in the credit environment in which the Group operates. Since its complete update in 2012, it was enhanced in 2014 through the addition of a clause on its clients Social and Environmental Responsibility (CSR) performance.

Social and Environmental Responsibility (CSR)

Clauses on Corporate Social and Environmental Responsibility (CSR) are included in specifi c new credit policies or when existing policies are updated.

Furthermore, sectoral policies and financing exclusions for certain sectors presenting signifi cant Environmental, Social and Governance (ESG) challenges (described in the Commitment 3 section of chapter 7 A C ommitted B ank: I nformation concerning the economic, social, civic and environmental responsi bility of BNP Paribas ) have also been implemented.

The Group is also taking a number of steps to improve the incorporation of ESG risks, especially climate change-related risks, in its credit risk system. Within the context of the application of the Duty of Vigilance law, in addition to sectoral policies and fi nancing exclusions, the Group also decided to strengthen the ESG assessment of its clients to make it more systematic and to better understand the ESG risk profi le of all its corporate clients.

INDIVIDUAL DECISION- MAKING PROCEDURES A system of discretionary lending limits has been established, under which all lending decisions must be approved by managers or representatives of the sales teams, with the approval of a formally designated member of RISK . Approvals are systematically evidenced in writing, either by means of a signed approval form or in the minutes of formal Credit Committee meetings. Discretionary lending limits correspond to aggregate commitments by business group and vary according to internal credit ratings and the specifi c nature of the business concerned. All transactions proposed are subject to a detailed review of the borrower s current and future position. The review, conducted as soon as the transaction is arranged and updated at least on an annual basis, is designed to ensure the Group has comprehensive information about the borrower and can monitor any potential changes in its situation. Certain types of lending commitments, such as loans to fi nancial institutions, sovereign loans and loans to customers operating in certain industries that are exposed to cyclical risks or to a rapid pace of change, are subject to specifi c

authorisation procedures and require the sign-off of an industry expert or designated specialist. In r etail b anking, simplifi ed procedures are applied, based on statistical decision-making aids.

Loan applications must comply with the Bank s Global Credit Policy and any relevant specifi c policies. Material exceptions undergo a special approval process. Before making any commitments, BNP Paribas carries out an in-depth review of any known development plans of the borrower, and ensures that it has thorough knowledge of all the structural aspects of the borrower s operations and that adequate monitoring will be possible.

The Comité de Crédit de Direction Générale (CCDG) is the highest level Group committee for all decisions related to credit and counterparty risk. It is chaired by a member of Executive Management or, by delegation, a Deputy Chief Operating Offi cer or the Chief Risk Offi cer (see Governance in section 5.3 Risk Management). It has ultimate decision-making authority for all loan applications for amounts in excess of individual discretionary lending limits or applications that would not comply with the Global Credit Policy.

MONITORING AND PORTFOLIO MANAGEMENT PROCEDURES

Monitoring exposures

A comprehensive risk monitoring system is organised around control units, which are responsible for ensuring that lending commitments comply with the loan approval decision, that credit risk reporting data are reliable and that risks accepted by the Bank are effectively monitored. Daily exception reports are produced and various early warning tools are used to identify early the deterioration of credit risks. The various monitoring levels are carried out under the supervision of RISK up to the General Management Doubtful Committee. This C ommittee regularly reviews all exposures in excess of a given threshold, for which it decides on the amount of impairment to be recognised or reversed, based on a recommendation from the business lines and with RISK s approval. In addition, quarterly Doubtful and Watch List Review Committees review fi les on the watch list and non-performing exposures. Depending on the amount of the commitments, these Review Committee meetings may be held locally, regionally or at head offi ce, and the most important also include representatives of Executive Management.

The responsibilities of the control teams include the monitoring of exposures against approved limits, covenants, and guarantees. This allows the identifi cation of any signs of deterioration against the risk profi le approved by the Credit Committee. Control teams fl ag up (to the RISK teams and business units) any cases that fail to comply with Credit Committee decisions and oversee their resolution. In some cases, a specifi c alert is sent to the senior management of RISK and of the relevant business unit. These are mainly where exceptions remain unresolved and/ or where there are serious indications of deterioration in the risk profi le compared with that approved by the Credit Committee.

Furthermore, in 2018 the General Credit Policy included specifi c checks to be conducted for loans granted to clients presenting high leverage ratios, in accordance with European Central Bank guidelines.