2018 Registration document and annual fi nancial report - BNP PARIBAS412
5 RISKS AND CAPITAL ADEQUACY PILLAR 3
5
Market risk
➤ TABLE 83 : SENSITIVITY OF REVENUES TO GLOBAL INTEREST RATE RISK BASED ON A 50 BASIS POINT INCREASE OR DECREASE IN THE INTEREST RATES [Audited]
Sensivity of 2018 revenues In millions of euros
For +50bp shock For -50 bp shock
EUR USD Other
currencies Total EUR USD Other
currencies Total
Year 1 125 41 19 185 (110) (45) (27) (182)
Year 2 453 13 44 510 (433) (17) (48) (498)
Year 3 604 38 56 698 (735) (44) (57) (836)
Sensivity of 2017 revenues In millions of euros
For +50bp shock For -50bp shock
EUR USD Other
currencies Total EUR USD Other
currencies Total
Year 1 117 52 24 193 (67) (53) (28) (148)
Year 2 437 44 33 515 (421) (52) (32) (506)
Year 3 553 81 48 683 (787) (96) (47) (930)
Sensitivity of the value of the net assets of the banking intermediation activity
As the assets and liabilities of the Group s banking intermediation business are not intended to be sold, they are not recognised or managed on the basis of their theoretical economic value measured by discounting future cash fl ows. Similarly, the theoretical economic value of the net assets does not affect the Group s capital.
However, pursuant to the regulatory requirements and calculation methods laid down by the European Banking Authority (EBA), the ratios of sensitivity to variations of +/-200 basis points (+/-2%) in interest rates, of the theoretical economic value of the net assets of the intermediation business in relation to Tier 1 and Tier 2 capital are regularly calculated. These ratios are compared to the 20% threshold used by the supervisor to identify situations where interest rate risk in the banking book may be material. At end-2018, the ratio was -2.7% for a 200-basis-point decrease and -4.6% for a 200-basis-point increase. These values are both well below the materiality threshold of 20%. The regulatory fl oors as defi ned in the EBA s Guidelines on the management of interest rate risk arising from non-trading book activities are applied to interest rate shocks.
HEDGING OF INTEREST RATE AND FOREIGN EXCHANGE RISKS [Audited] Hedges initiated by the Group consist mainly of interest rate or currency hedges using derivative financial instruments (swaps, options and forwards).
Depending on the hedging objective, derivative fi nancial instruments used for hedging purposes are qualifi ed either as fair value hedges, cash fl ow hedges, or hedges of net investments in foreign operations. Each hedging relationship is formally documented at inception. The documentation describes the hedging strategy, identifi es the hedged item and the hedging instrument, and the nature of the hedged risk; and describes the methodology used to test the expected (prospective) and actual (retrospective) effectiveness of the hedge.
Global interest rate risk
The Bank s strategy for managing global interest rate risk is based on closely monitoring the sensitivity of the Bank s net income to changes in
interest rates, factoring in all interest rate risks. The aim is to ensure the stability and regularity of the interest margin. This monitoring requires an extremely accurate assessment of the risks incurred so that the Bank can determine the hedging strategy, after taking into account the effects of netting the different types of risk. These hedging strategies are defi ned and implemented by entity and by currency.
The hedges can comprise swaps and options and are typically accounted for as fair value hedges or cash fl ow hedges. They may also take the form of government securities and are classifi ed on an accounting basis as Financial assets at amortised cost or Financial assets at fair value through equity .
The beginning of 2018 was marked by a sense of optimism in the American and European fi nancial centres. In the euro zone, with an encouraging series of economic indicators and infl ation outlook, the European Central Bank began reducing its asset purchase programme from EUR 60 billion to EUR 30 billion per month. The end of this purchase programme was announced in June 2018 and then put in place in December 2018.
Within the euro zone, interest rates remained low, the ECB indicating that an increase in its key interest rates would not occur before summer 2019 and could be delayed as long as necessary to ensure a change in infl ation in line with the current expectations of a sustainable adjustment.
In the United States, the optimism, even stronger given a more favourable economic environment, prompted the Federal Reserve to raise its interest rates. In October, the yield of the ten -year Treasury note exceeded 3.20%, its highest level since 2011.
The end of 2018 was nevertheless marked by concerns about the economic outlook, growth and infl ation in the euro zone, the United States or, indeed, globally. Furthermore, these concerns have been reinforced by geopolitical risks.
