BPCE - 2018 Registration document

6 RISK REPORT

Risk governance and management system

The following risks are concentrated in specific scopes of activity: market risks; ● emerging country risk; ● securitization risk. ● Changes to our business model are increasing our exposure to some types of risks, particularly risks related to asset management and international businesses. Groupe BPCE does not conduct business unless it has the associated risks strictly under control, nor does it exercise proprietary trading activities. Activities with high risk-reward profiles are strictly controlled. In all activities, entities and regions of operation, the Group undertakes to meet the highest standards of ethics, conduct, best execution and transaction security. Groupe BPCE’s risk appetite is defined as the level of risk it is willing to accept with the goal of increasing its profitability while maintaining solvency. This risk appetite must be aligned with the institution’s operating environment, strategy and business model, while incorporating customer interests. In determining its risk appetite, Groupe BPCE aims to steer clear of any major pockets of concentration and to optimize capital allocation. Risk appetite framework Groupe BPCE’s general risk appetite framework was validated by the BPCE Supervisory Board, as was its 2018 annual review. It is consistent with the “TEC 2020” strategic plan, as applied to the entire risk governance structure, including the Risk Management Umbrella Committee. More specifically, this general framework draws in turn on a framework document that gives both a qualitative and quantitative description of risks the Group is willing to take. It also describes the governance and operational principles currently in force at Groupe BPCE. The operational risk appetite framework is based on indicators broken down by major risk category. There are six major risk categories: solvency risk, credit risk (credit and counterparty risk, concentration risk and securitization risk), non-financial risks, financial risks (market risks), liquidity risk and interest rate risk. These six categories are subject to indicators at the highest level of Group governance. Groupe BPCE enjoys high liquidity and solvency levels: in terms of solvency, the Group is able to absorb, if need be, the ● occurrence of a risk at entity or Group level; in terms of liquidity, the Group has a significant reserve consisting ● of cash and securities enabling it meet regulatory requirements, pass stress tests and access central bank unconventional financing mechanisms. It also has high-quality assets eligible for market funding mechanisms and those offered by the ECB. The Group ensures the robustness of this system by conducting comprehensive stress tests on a regular basis, designed to verify the Group’s resilience in the event of a major crisis. The implementation of the risk appetite framework is centered on four key components: (i) the definition of groupwide standards, (ii) the existence of a set of limits in line with those defined by

regulations, (iii) the distribution of expertise and responsibilities between the entities and the central institution and (iv) the operation of the governance process within the Group and the different entities, enabling the efficient and resilient application of the risk appetite framework. The Group’s risk appetite framework is regularly updated, notably during the annual review, and is centered on a series of successive limits associated with separate respective authorization levels, i.e.: a limit which, if breached, calls for BPCE Management Board ● members to decide either to require the breach to be corrected or to allow the transaction to go ahead on an exceptional basis; a resilience limit: breaching this limit exposes the Group to ● potential business continuity and/or stability risk. Any such breach must be reported to the BPCE Supervisory Board and addressed by a specific action plan validated by the Board; an extreme limit in conjunction with the Group’s resolution and ● recovery plan mechanism, which, if breached, could jeopardize the Group’s very survival. This extreme limit concerns certain indicators adopted in respect of the Group’s risk appetite. A quarterly dashboard is prepared by the Group’s Risk, Compliance and Permanent Control division, for the purpose of regularly and extensively monitoring all risk indicators and reporting to the supervisory body or/and any committee thereof. The risk appetite framework has been adapted by the entities for consistent group-wide implementation. STRESS TESTING SYSTEM Groupe BPCE has been developing a stress testing system since 2011, complementing the business stress tests that can already be performed using each of the risk modules for Group strategic analysis purposes and regulatory purposes. There are two types of stress tests: internal stress tests; ● regulatory stress tests (including in particular the EBA’s 2018 stress ● test published on November 2, 2018). Governance of the Group’s stress testing system is based on a comprehensive approach covering all Group entities, taking into consideration their specific characteristics, and covering the following risks: credit risk: change in cost of risk and risk-weighted assets; ● securitization portfolios and counterparty risk: change in ● impairment and risk-weighted assets; market risks: market shocks, change in securities portfolios and ● risk-weighted assets; operational risk; ● insurance risk. ● The Group also examines scenarios on NII, all profit and loss items, and income, with the final impact on solvency. Risks associated with sovereign exposures are addressed according to their accounting classification under market risk or credit risk.

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Registration document 2018