BPCE - 2018 Registration document

6 RISK REPORT Summary of risks

6.1.3

Regulatory changes

INVESTMENT FIRMS (IFS) The Austrian Presidency compromise, aimed at ensuring fair competition between banks and IFs, has been hotly contested not only by the United Kingdom – still at the negotiation table despite Brexit – but also by Germany and Luxembourg. France’s position is that the text should not be adopted until Brexit negotiations have been finalized. NON-PERFORMING LOANS (NPLS) The Commission has proposed a new regulation which would set a mandatory minimum provision for any newly originated loans that become non-performing. Legislators want to move very quickly, notably to finalize efforts to reduce risks in Europe (specifically to reduce NPL books), thus paving the way for progress on the European Deposit Insurance Scheme (EDIS). As a result, the proposed regulation on NPLs is likely to be adopted in its current form (or close): the Council and Parliament wish to clarify the principle of line-by-line application for each transaction (and not at book level) and the implementation of the text at the effective date (as opposed to retroactively at the publication date of the draft version). CALL FOR ADVICE TO THE EBA On May 4, the European Commission issued a Call for Advice to the EBA, seeking technical advice to assess the potential impact of the various elements of the Basel package of reforms on the European banking sector, determine any possible implementation challenges, and propose adjustments to inputs or methodologies ( e.g. on the application of the output floor or treatment of specialized lending) where applicable. In response, the EBA shall prepare a draft report in early 2019 and submit a final report to the European Commission in June 2019. To that end, the EBA called on banks to complete two surveys: a quantitative survey (June 2018) and a qualitative survey (January 11, 2019). BPCE considers CRR3/CRD6 (transposition of Basel IV) and EDIS to be the priorities for 2019. There is a strong risk in France that the Governor of the Banque de France will recommend a 25-bp increase in the countercyclical capital buffer (to 50 bp) to the Economy Minister, applicable to all French exposures as from July 1, 2019. In addition, the Financial Sector Assessment Process (FSAP) required by the IMF every five years was initiated in June 2018 and will end in July 2019.

Several major regulatory changes were on the horizon by the end of 2018 on both the international and European fronts. At the international level, the Basel Committee on Banking Supervision (BCBS) finalized its recalibration of the regulatory framework governing market risks – the Fundamental Review of the Trading Book (FRTB) – and announced it would be overseeing the transposition of the entire Basel III reform, both in terms of content and timeline. The “Finalization of Basel III” involves the revision of methods used to measure credit risk, CVA risk and operational risk, as well as the application of an RWA floor. The finalization was published in December 2017 and calls for all reforms, including the FRTB, to take effect in 2022. The BCBS also commented on the risks of leverage ratio window dressing, and stated that it was planning a revision for the purposes of modifying disclosure requirements, particularly for securities financing transactions and derivatives. There were also several developments at the European level, including the review of the Risk Reduction Measures (RRM) package relating to draft directives and regulations (CRR2, CRD5, BRRD2, SRMR2) and the introduction of prudential backstops to CRR. Other developments are in progress, but are unlikely to be completed before the end of the legislative term, such as the review of the European Supervisory Authorities (ESAs), harmonization of regulations governing investment firms, transposition of the Basel III package (draft CRR3/CRD6) and review of the European Deposit Insurance Scheme (EDIS). REVIEW OF RISK REDUCTION MEASURES (“BANKING PACKAGE”) The Austrian Presidency of the European Union submitted a compromise to the Committee of Permanent Representatives (COREPER) and to the ECOFIN Council comprising the Economy and Finance Ministers of the EU Member States on November 30 and December 4, respectively. Pending the plenary vote on the draft CRR2, CRD5, BRRD2 and SRMR on an as-yet unannounced date, the financial center is expecting to obtain a certain number of positive concessions (still to be confirmed): the Danish Compromise (on the weighting of insurance investments by banks) has been extended, fairness was introduced in terms of subordination requirements (re: Resolution) between the 37 Top Tier Banks and GSIBs, a reporting requirement was established only with respect to market risk (FRTB) before the finalization of Basel III, the deduction of software investments from capital was eliminated (although prudential treatment of software investments will continue to be governed by the EBA), and repo/trade finance/factoring activities will receive more favorable treatment with respect to the NSFR. A compromise was reached regarding leverage ratio window dressing, a practice labeled unacceptable by the BCBS: the calculation will remain unchanged, with banks simply required to submit additional reports (on average daily) on Securities Financing Transactions (SFTs) and derivatives to supervisors (2019 program). It should be noted that regulatory texts refer to the implementation of EBA RTS (Regulatory Technical Standards) or ITS (Implementing Technical Standards) for certain subjects.

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Registration document 2018