2018 Registration document and annual fi nancial report - BNP PARIBAS372
5 RISKS AND CAPITAL ADEQUACY PILLAR 3
5
Credit risk
CREDIT RISK MITIGATION TECHNIQUES
Credit risk mitigants (CRM) are taken into account according to the regulation. In particular, their effect is assessed under conditions characteristic of an economic downturn. The CRM fall into two main categories:
■ funded credit protection (collateral) pledged to the Bank is used to secure timely performance of a borrower s fi nancial obligations;
■ unfunded credit protection (personal guarantee) is the commitment by a third party to replace the primary obligor in the event of default. By extension, credit insurance and credit derivatives (purchased protection) fall into this category.
For the scope under the IRB Approach, personal guarantees and collaterals are taken into account, provided they are eligible, by decreasing the Loss Given Default (LGD) parameter corresponding to an increase in the Global Recovery Rate (GRR) that applies to the transactions of the banking book. The value taken into consideration takes account, where relevant, of currency and maturity mismatches and, for funded credit protection, of a haircut applied to the market value of the pledged asset based on a default scenario during an economic downturn. The amount of unfunded credit protection to which a haircut is applied depends on the enforceable nature of the commitment and the risk of simultaneous default by the borrower and guarantor.
For the scope under the standardised approach, unfunded credit protection is taken into account provided it is, by applying the more favourable risk weight of the guarantor to a portion of the secured exposure adjusted for currency and maturity mismatches. Funded credit protection is taken into account as a decrease in the exposure, after adjustment for any currency and maturity mismatches and a discount to take account of volatility in market value for fi nancial security collaterals.
The assessment of credit risk mitigating effect follows a methodology that is approved for each activity and is used throughout the Group. These techniques are monitored in accordance with the monitoring and portfolio management procedures described in the Credit risk management policy section.
Close to 70% of exposure to property loans is concentrated in our two main Domestic Markets (France, Belgium). In view of the specifi c features of these markets (amortising long-term fi nancing, primarily at fi xed rates), the LTV (Loan-to-value) ratio is not a key monitoring indicator at Group level.
FUNDED CREDIT PROTECTION Funded credit protection is divided into two categories:
■ fi nancial collateral: this consists of cash amounts (including gold), mutual fund units, equities (listed or unlisted) and bonds;
■ other diverse forms of collateral: these include real estate mortgages or ship mortgages, pledge of equipment or inventories, transfer of commercial receivables or any other rights to an asset of the counterparty.
To be eligible, funded credit protection must fulfi l the following conditions:
■ the value of the collateral must not be highly correlated with the risk on the obligor (in particular, shares of the obligor are not eligible);
■ the pledge must be documented;
■ the pledged asset must be traded on a liquid secondary market to enable rapid resale;
■ the Bank must have a consistently updated value of the pledged asset;
■ the Bank must have reasonable comfort in the potential appropriation and realisation of the asset concerned.
In the Retail Banking business, the presence or absence of a particular type of collateral may, depending on the coverage ratio, lead to assigning the exposure to particular LGD class on a statistical basis.
UNFUNDED CREDIT PROTECTION Guarantors are subject to the same rigorous credit risk assessment process as primary obligors and are assigned risk parameters according to similar methods and procedures.
Guarantees are granted by the obligor s parent company or by other entities such as fi nancial institutions. Other examples of guarantees are credit derivatives, guarantees from public insurers for export fi nancing or private insurers.
Consideration of a guarantee consists of determining the average amount the Bank can expect to recover if the borrower defaults and the guarantee is called in. It depends on the amount of the guarantee, the risk of simultaneous default by the borrower and the guarantor (which is a function of the probability of default of the borrower, of the guarantor, and the degree of correlation between borrower and guarantor default, which is high if they belong to the same business group or the same sector and low if not) and the enforceable nature of the guarantee.
OPTIMISING CREDIT RISK MANAGEMENT THROUGH CDS As part of its role of optimising credit risk management for CIB, Portfolio Management (PM) sets up hedges using credit derivatives, and mainly credit default swaps (CDS). These CDS are used as part of an active management policy, the main aim being to hedge migration and concentration risks and manage major exposures. The underlying assets are loans made to large corporates by CIB Corporate Banking, and occasionally those made by Retail Banking.
