BPCE - 2018 Registration document

RISK REPORT Summary of risks

The purpose of the process is to assess the strength and stability of the French financial system as a whole. The FSAP will be based on liquidity and solvency stress tests conducted on 7 French banks (including BPCE) using prudential data (COREP, FINREP, etc.) and public information. The IMF takes a top-down approach to stress tests. Banks are not asked to contribute technically by way of additional reports.

Interviews were held with the banks in December 2018 and on-site audits will be performed in March 2019. Deliverables will be discussed between March and July 2019. The report will then be submitted to the IMF Board for approval. The Directorate General of the French Treasury is in charge of coordinating the process between the French authorities. It plans to take the opportunity to promote the French legislative and supervisory framework.

6.1.4

Main risks and emerging risks

MAIN RISKS Credit and counterparty risk: at € 1.3 billion in 2018, Groupe BPCE’s cost of risk decreased 6.1% compared to 2017. Average annual cost of risk (expressed in basis points versus customer outstandings at the start of the period) reached a record low of 19 bp in 2018, down 1 bp from 2017. Market risks: market risk indicators are monitored and analyzed at various position aggregation levels, giving an overview of total exposure and risk consumption by risk factor. VaR and stress indicators were kept very low for the Group in 2018 (VaR of € 14.2 million at end-2018 and stress test at - € 95 million for the most adverse scenario). Operational risk: considering the nature of its businesses, 51% of Groupe BPCE’s operating losses fall into the Basel category “execution, delivery and process management”. Liquidity, interest rate and foreign exchange risks: Groupe BPCE maintained a strong liquidity position over the course of 2018 thanks to robust coverage of stress scenarios. At December 31, 2018, liquidity reserves covered 160% of all short-term funding as well as short-term maturities of MLT debt. Groupe BPCE also conducted an “Economic Value of Equity” review to ensure it would be able to incorporate future regulatory changes involving interest rate risk in the banking book. EMERGING RISKS Groupe BPCE places great importance on anticipating and managing emerging risks in today’s constantly changing environment. The banking and financial environment in which Groupe BPCE operates is exposed to numerous risks, calling for the implementation of an increasingly strict, demanding policy to control and manage these risks. Some of the risks to which Groupe BPCE is exposed are set out below. However, this is not a comprehensive list of all of the risks incurred by Groupe BPCE in the course of conducting its business or given the environment in which it operates. The risks presented below are those identified to date as significant and specific to Groupe BPCE, and which are liable to have a material adverse impact on its business, financial position and/or results. Risk factors 6.1.5

The international geopolitical environment is continuously under watch in light of the political instability and budget imbalances affecting certain geographic regions. In Europe, the rise of populism in many countries, tensions in Italy over the sustainability of the country’s debt, and post-Brexit negotiations with the United Kingdom have brought risks to bear on the stability of the European Union and its currency, generating risks for the Group’s exposures. Ultra-low interest rates are weighing on the profitability of commercial banking activities, due to the predominance of fixed-rate home loans, and on life insurance activities as well. Interest rate hikes, already under way in the United States, hold great significance for Groupe BPCE, calling for preparation and diversification of funding sources. With the increasing digitization of the economy and banking transactions at Group level, cyber-risks are on the rise for information systems and customers alike, calling for heightened vigilance in order to anticipate and guard against hacking. Misconduct risk is monitored with operational risks and has been written into Compliance Charters, the Group code of conduct and ethics, and conflicts of interest management systems at all levels of Groupe BPCE. Regulatory developments are another area of permanent supervision, as the banking industry is subject to increasingly strict requirements and close regulatory supervision. Climate change and Corporate Social Responsibility are a growing concern for financial institutions, as addressed in their risk management policies (especially at BPCE), but also from a commercial standpoint in regards to demanding customer expectations.

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CREDIT AND COUNTERPARTY RISKS Default and counterparty risks

A substantial increase in asset impairment expenses recorded on Groupe BPCE’s outstanding loans and receivables may have an adverse impact on its results and financial position. In the course of its lending activities, Groupe BPCE regularly recognizes charges for asset impairments in order to reflect, if necessary, actual or potential losses on its portfolio of loans and receivables. Such impairments are expensed under “Cost of risk”. Groupe BPCE’s total charges for asset impairments are based on the Group’s measurement of past losses on loans, volumes and types of loans granted, industry standards, loans in arrears, economic conditions and other factors associated with the recoverability of

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Registration document 2018