BPCE - 2018 Registration document

6 RISK REPORT Credit risk

manages risk information systems in accordance with an annual ● IT plan, working closely with the IT departments, while defining the standards to be applied for the measurement, control, reporting and management of credit risks. The different levels of control at Groupe BPCE operate under the supervision of the DRCCP, which is also responsible for consolidated summary reporting to the various decision-making bodies and committees, in particular the Group Watchlist and Provisions Committee. The aim of risk supervision is to: improve the identification of various degrees of situations that are ● stressed or becoming stressed, which may worsen and veer into default. A set of indicators used to identify incidents on customer accounts (past due payments, irregular payments, etc.) or external events (rejected notes, external ratings, customer life events) contributes to this supervisory system. This system was enhanced in 2018, with the inclusion of new supervisory triggers; enhance the quality of customer data through a data quality ● supervision and improvement system, in addition to seeking out high-quality exposures; use observed results to adjust the framework of permanent controls ● performed by each institution, based on its own macro-level risk mapping. The business line heads in charge of the content of the Level 2 permanent control framework and the heads of periodic control can then work together to cross-check the risk areas identified from the results of their own investigations, and complete: the self-assessments of Groupe BPCE institutions, - decisions on how to change the control systems within their - remit. The Credit Risk business line, which is in charge of the content of the Level 2 permanent control framework, receives summaries of the audit reports from the periodic control teams, and can also determine whether the Level 2 periodic control framework needs to be adjusted for the institutions. Risk prevention and monitoring at Groupe BPCE focuses on the quality of information, which is a heightened concern under the requirements of Regulation BCBS 239 and is necessary for proper risk assessment, as well as the amount of risk taken and changes in these risks. The application of the “gross leverage ratio” to non-investment grade corporate counterparties (revenue > € 50 million) strengthens oversight of potential overindebtedness. The supervision teams are responsible for ensuring that the sector watch is updated by focusing on “high-risk” business sectors and for analyzing portfolios to help identify the main concentrations of risk. This system is enhanced with a set of industry-based limits. High-risk loans and counterparties (on the watchlist) and the provisioning policy for the main risks shared by several entities (including Natixis) are regularly examined by the Group Watchlist and Provisions Committee. Groupe BPCE performs three main types of stress test on credit risk:

the EBA stress test, performed every 2 years, aimed at testing the ● resilience of credit institutions to simulated shocks, and comparing their results. The outcome of the EBA stress test may result in stronger capital requirements or other mandatory measures imposed by the supervisor, which has not been the case for Groupe BPCE to date; Groupe BPCE’s internal stress test. This test is performed once a ● year and its results are applied to ICAAP and the Recovery Plan. It covers several more scenarios than the EBA stress test, and includes changes in projections on the entire balance sheet. The baseline scenario is also used to challenge Groupe BPCE’s medium-term plan. For the purposes of the Recovery Plan, an additional test is conducted on the real estate portfolio; specific stress tests. These tests may be performed at the request of ● an external authority (supervisor) or an internal body. For example, in 2016, the ACPR requested a stress test on the commercial real estate portfolio, focusing specifically on office space. The results, particularly those of the latest EBA stress tests, have always demonstrated Groupe BPCE’s resilience to the shocks simulated in the test scenarios. They are consistently used with the aim of learning as much as possible from the stress tests. QUALITY ASSESSMENT OF LOAN OUTSTANDINGS AND IMPAIRMENT POLICY System governance From a regulatory standpoint, Article 118 of the Ministerial Order of November 3, 2014 on internal control specifies that “at least once each quarter, supervised companies must perform an analysis of changes in the quality of their loan commitments. In particular, this review should determine, for material transactions, whether any reclassifications need to be conducted among the internal risk credit risk assessment categories and, if necessary, the appropriate allocations to non-performing loans and charges to provisions.” When a counterparty is placed on either a local Watch List (WL) or the Group WL, supervision of the counterparty in question is enhanced (Performing WL) or the decision is made to record an appropriate provision (Default WL). Statistical provisions for performing loans, calculated at Group level for the networks in accordance with IFRS 9 requirements, are measured using a methodology validated by Group committees (reviewed by an independent unit and validated by the Group Models Committee and the Group Standards & Methods Committee). These provisions include scenarios of changes in the economic environment determined each year by the Group’s Economic Research team and validated by the Executive Management Committee, coupled with probabilities of occurrence reviewed quarterly by the Group Watchlist and Provisions Committee. Provisions for loans in default are calculated at the individual institution level, with the exception of shared loans in default exceeding € 15 million and subject to central coordination as decided by the Group Watchlist and Provisions Committee on a quarterly basis. The amount of the provision is calculated by incorporating the present value of collateral (prudent valuation), without systematically applying a haircut at this point: a methodology aimed at deploying a haircut policy will be established when the NPL guidance is implemented. Any defaulted exposures not covered by provisions shall be subject to enhanced justification requirements to explain why no provision has been recorded.

640

Registration document 2018