BPCE - 2018 Registration document

6 RISK REPORT

Capital management and capital adequacy

Capital management and capital adequacy 6.3

6.3.1

Regulatory framework

Regulatory monitoring of credit institutions’ capital is based on regulations defined by the Basel Committee. These regulations were reinforced following the introduction of Basel III, with an increase in the level of regulatory capital requirements and the introduction of new risk categories. Basel III recommendations were incorporated in EU Directive 2013/36/EU (Capital Requirements Directive – CRD IV) and Regulation No. 575/2013 (Capital Requirements Regulation – CRR) of the European Parliament and of the Council. As of January 1, 2014, all EU credit institutions are subject to compliance with the prudential requirements set out in these texts. Credit institutions subject to CRD and CRR are thus required to continuously observe: the Common Equity Tier 1 (CET1) ratio; ● the Tier 1 ratio, i.e. CET1 plus additional Tier 1 capital (AT1); ● the total capital ratio, i.e. Tier 1 plus Tier 2 capital; ● and, as of January 1, 2016, the capital buffers which can be used to ● absorb losses in the event of tensions. These buffers include: a capital conservation buffer, comprised of Common Equity - Tier 1, aimed at absorbing losses in times of serious economic stress, a countercyclical buffer, aimed at protecting the banking sector - from periods of excess aggregate credit growth. This common equity surcharge is supposed to be adjusted over time in order to increase capital requirements during periods in which credit growth exceeds its normal trend and to relax them during slowdown phases, a systemic risk buffer for each Member State aimed at preventing - and mitigating the systemic risks that are not covered by regulations (negligible for Groupe BPCE), the different systemic risk buffers aimed at reducing the risk of - failure of systemically important financial institutions. These buffers are specific to each bank. Groupe BPCE is on the list of other systemically important institutions (O-SIIs) and global systemically important banks (G-SIBs). As these buffers are not cumulative, the highest buffer applies. The ratios are equal in terms of the relationship between capital and the sum of: credit and dilution risk-weighted assets; and ● capital requirements for the prudential supervision of market risk ● and operational risk, multiplied by 12.5.

They are subject to a phase-in calculation aimed at gradually transitioning from Basel 2.5 to Basel III. These phase-in arrangements mainly cover: changes in capital ratios before buffers: since 2015, the minimum ● Common Equity Tier 1 ratio has been 4.5%, the minimum Tier 1 capital ratio 6%, and the minimum total capital ratio 8%; changes in capital buffers, applied gradually from fiscal year 2016 ● until 2019: the capital conservation buffer, comprised of Common Equity - Tier 1, is set for 2019 at 2.5% of the total amount of risk exposures (0.625% as from January 1, 2016, plus 0.625% per year until 2019), Groupe BPCE’s countercyclical buffer is the EAD-weighted - average of the buffers defined for each of the Group’s countries of operation. Groupe BPCE’s maximum countercyclical buffer as from January 1, 2016 is 0.625%. As most of Groupe BPCE’s exposures are located in countries whose countercyclical buffer has been set at 0%, the Group considers that this rate will be very close to 0%, the G-SIB buffer is currently set at 1% for the Group by 2019 - (0.25% as from January 1, 2016, plus an additional 0.25% per year until 2019); the gradual incorporation of Basel III provisions: ● the new regulation has eliminated the majority of the prudential - filters, and in particular those relating to unrealized capital gains and losses on equity instruments and debt securities at fair value through other comprehensive income. This elimination is being implemented gradually each year in 20% increments for Common Equity Tier 1 capital. Accordingly, unrealized capital gains have been fully included since January 1, 2018. Unrealized capital losses have been included since 2014, in accordance with Articles 14 and 15 of ECB Regulation (EU) - No. 2016/445 of March 14, 2016, unrealized capital gains and losses on sovereign securities are no longer subject to an exemption. They have been fully deducted since January 1, 2018, the capped or excluded share of non-controlling interests has - been gradually deducted from each capital tier in 20% increments every year since 2014, and has therefore been fully deducted since January 1, 2018, deferred tax assets (DTAs) that rely on future profitability and - linked to tax loss carryforwards have been gradually deducted in 10% increments since 2015. In accordance with Article 19 of ECB Regulation (EU) No. 2016/445 of March 14, 2016, deferred tax assets have been deducted at a rate of 80% since January 1, 2018 and will be fully deducted in 2019,

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Registration document 2018