BPCE - 2018 Registration document

RISK REPORT Credit risk

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. From a structural standpoint, Groupe BPCE’s business model incurs a lower-than-average cost of risk for the French market. In general, Groupe BPCE’s credit approval process is based first and foremost on the customer’s ability to repay the loan, i.e. the customer’s capital flows, with clearly identified sources and channels. RATING POLICY Credit risk measurement relies on internal rating systems adapted to each category of customer and transaction. The Risk, Compliance and Permanent Control division is responsible for defining and controlling the performance of these rating systems. Groupe BPCE applies an internal rating methodology, shared by both networks and the main subsidiaries (specific to each customer segment), for individual and professional retail customers, as well as for corporate customers, “real estate professionals”, “central banks and other sovereign exposures”, “central governments”, “public-sector and similar debt” and “financial institutions” segments. As of end-2018, the project finance rating system is now applied groupwide. CAPS AND LIMITS The system of internal caps used across the Group, which are lower than the regulatory caps, is applied to all Group entities. Likewise, the internal caps system used by the institutions is lower than or equal to the Group internal caps, and is applied to all entities of the Banque Populaire and Caisse d’Epargne networks. A groupwide set of limits has also been established for the major asset classes, major counterparty groups within each asset class, and exposure levels for countries and industries. These limits apply to all Group institutions. The risk supervision mechanisms have been strengthened since the establishment of the general credit risk policy for the Group, as well as the risk policy specific to corporates. Lastly, risk supervision is adapted to each sector via a monthly sector watch, which is a responsibility shared with all Group institutions. The sector watch has resulted in policies setting forth recommendations for all Group institutions on “at-risk” sectors. On behalf of the Group Risk Management and Compliance Committee, the DRCCP measures and verifies that these risk supervision mechanisms (individual and topical limits) are correctly implemented at each institution. The Group Supervisory Board is kept informed as Group internal limits are monitored, and of any breaches of the limits defined in accordance with the risk appetite framework. Method used to assign operational limits on internal capital Groupe BPCE’s risk appetite defines a set of limits used to oversee the allocation of capital associated with securitization exposures, with respect to potential and past volatility on this point.

The quarterly Group risk dashboard is used to monitor consumption of RWA in the Group’s main asset classes: it compares any differentials in terms of changes between gross exposures and consumption of RWA. By using these systems, the Group is able to accurately monitor the change in capital needed to cover risks in each asset class, while also observing any changes in the quality of the asset classes in question. Correlation risk policy Correlation risk is governed by a special decision-making process, where a counterparty offers its own shares as collateral. A top-up clause is systematically required on such transactions. For wrong-way risk, usually associated with collateral swaps between credit institutions, BPCE’s liquidity reserve procedure defines this criterion as follows: “the counterparty to the repo and the securities received as collateral for that repo shall not be included in the same regulatory group.” However, these transactions may be reviewed on a case-by-case basis, under a special decision-making process, where the collateral consists exclusively of retail loans for residential real estate. CREDIT RISK MONITORING AND SUPERVISION SYSTEM Within its remit and across its entire scope, the Risk, Compliance and Permanent Control division: presents the Management Board and Supervisory Board with a risk ● appetite framework for the Group and ensures its implementation and roll-out at each major entity; helps draw up risk policies on a consolidated basis, examines overall ● risk limits, takes part in discussions on capital allocation and ensures that portfolios are managed in accordance with these limits and allocations; helps the Groupe BPCE Management Board identify emerging risks, ● concentration of risk and other adverse developments and devise strategy and adjust risk appetite; performs any specific analyses and stress tests with the goal of identifying areas of risk and the Group’s resilience under various predetermined shock scenarios; defines and implements risk taking and management standards and ● methods for consolidated risk measurement, risk mapping, risk-taking approval, risk control and reporting, and compliance with laws and regulations; assesses and controls the level of risk across the Group; ● conducts permanent supervision, including detecting and resolving ● limit breaches and centralized forward-looking risk reporting on a consolidated basis; conducts controls – or ensures through the principle of subsidiarity ● that controls are conducted – to verify that the operations and internal procedures of Group companies comply with legal, professional, or internal standards that apply to banking, financial and Insurance activities; performs Level 2 controls of certain processes used to prepare ● financial information and implements a Group Level 2 permanent risk control system;

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Registration document 2018