2018 REGISTRATION DOCUMENT AND ANNUAL FINANCIAL REPORT

2018 Registration document and annual fi nancial report - BNP PARIBAS434

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

Operational risk

OPERATIONAL RISK EXPOSURE

The chart below shows the losses linked to operational risk, according to the event classifi cation defi ned in the current regulation.

➤ FIGURE 14: OPERATIONAL LOSSES BREAKDOWN BY EVENT TYPE (AVERAGE 2010 -2018 )(*)

63% (2017: 60%) Clients, products

and business practices

1% (2017: 1%) Employment practices and workplace safety

13% (2017: 15%)

3% (2017: 3%) Business disruption and system failures

1% (2017: 1%) Damage to physical assets

External fraud

18% (2017: 18%) Execution, delivery and process management

1% (2017: 2%) Internal fraud

(*) Percentages in brackets correspond to average loss by type of event for the 2009-2017 period.

In the period 2010-2018, the main type of operational risk falls within the category of Clients, products and business practices , representing on average more than half of the Group s fi nancial impacts. The magnitude of this category is related to the fi nancial terms of the comprehensive settlement concluded in June 2014 with the US authorities with respect to the review of certain US dollar transactions. Process failures, mainly including execution or transaction processing errors, and external fraud are the types of Group incidents with the second and third highest fi nancial impact, respectively.

BNP Paribas Group pays the utmost attention to analysing its operational risk incidents in order to continuously improve its control system.

CAPITAL REQUIREMENT CALCULATION

Operational risk-weighted assets are calculated by multiplying the capital requirement by 12.5.

APPROACH ADOPTED BNP Paribas uses a hybrid approach combining the Advanced Measurement Approach (AMA), standardised approach, and basic indicator approach.

In terms of net banking income, most legal entities within the Group s prudential scope of consolidation use the Advanced Measurement Approach (AMA). This includes most Retail Banking activities in the domestic networks and Private Banking, as well as Corporate and Institutional Banking.

Advanced Measurement Approach (AMA)

Under the AMA for calculating capital requirements, the Bank uses an internal operational risk model based on the four components required by the regulations, namely:

■ internal historical loss data from operational risk;

■ external loss data from operational risk;

■ environmental and internal control factors;

■ analysis of forward-looking scenarios, known as potential incidents in the BNP Paribas Group.

BNP Paribas internal model in place since 2008 includes the following features:

■ an aggregate annual loss distribution, meaning that the frequency and severity of losses from operational risks are modelled using an actuarial approach and according to distributions calibrated with available data;

■ it uses historical data as well as prospective scenarios to calculate capital requirements, with a predominance for scenarios because they can be shaped to refl ect severe and less frequent operational risks;