2018 Registration document and annual fi nancial report - BNP PARIBAS396

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Market risk

5.7 Market risk

Market risk is the risk of incurring a loss of value due to adverse trends in market prices or parameters, whether directly observable or not.

Observable market parameters include, but are not limited to, exchange rates, prices of securities and commodities (whether listed or obtained by reference to a similar asset), prices of derivatives, and other parameters that can be directly inferred from them, such as interest rates, credit spreads, volatilities and implied correlations or other similar parameters.

Non-observable factors are those based on working assumptions such as parameters contained in models or based on statistical or economic analyses, non-ascertainable in the market.

In fixed income trading books, credit instruments are valued on the basis of bond yields and credit spreads, which represent market parameters in the same way as interest rates or foreign exchange rates. The credit risk arising on the issuer of the debt instrument is therefore a component of market risk known as issuer risk.

Liquidity is an important component of market risk. In times of limited or no liquidity, instruments or goods may not be tradable or may not be tradable at their estimated value. This may arise, for example, due to low transaction volumes, legal restrictions or a strong imbalance between demand and supply for certain assets.

The market risk related to banking activities encompasses the interest rate and foreign exchange risks stemming from banking intermediation activities.

Market risk is presented in this section in two parts:

■ market risk linked to trading activities and corresponding to trading instruments and derivative contracts;

■ market risk linked to banking activities encompassing the interest rate and foreign exchange risks stemming from banking intermediation activities.

CAPITAL REQUIREMENT AND RISK-WEIGHTED ASSETS FOR MARKET RISK

➤ TABLE 72: MARKET RISK CAPITAL REQUIREMENT AND RISK-WEIGHTED ASSETS

In millions of euros

RWAs Capital requirements

31 December 2018

31 December 2017 Variation

31 December 2018

31 December 2017 Variation

Internal model approach 17,726 14,852 2,874 1,418 1,188 230

Standardised approach 1,780 1,147 633 142 92 50

Trading book securitisation positions 442 667 (225) 35 53 (18)

TOTAL MARKET RISK 19,948 16,666 3,282 1,596 1,333 263

Within the BNP Paribas Group, market risk is primarily handled using the internal model approach.

2018 saw an increase in market risk related in particular to the change in asset volumes and model updates.