BPCE - 2018 Registration document

6 RISK REPORT Credit risk

REVIEW OF INTERNAL RATINGS-BASED MODELS The DRCCP is responsible for reviewing the Group’s internal models whenever a new model is being developed or an existing model changed. It also performs the annual review of backtests on credit, market and ALM risk models. The validation team conducts independent analyses in compliance with a charter and procedures that describe interactions with the modeling entities and the steps of the review. This review is based on a set of qualitative and quantitative criteria, and mainly addresses the following points: documentation; ● methodology, including the validity of assumptions; ● performance; ● robustness; ● compliance with regulations. ● The level of detail in the review is adjusted for the type of work examined. In any event, it must at least include a document review focusing on the quantitative aspects of rating systems. For a new model or a major change to an existing model, in addition to this review, the computer codes are checked and additional tests are run (comparative calculations). The scope of the Validation division’s involvement may be expanded before and after an investigation of data quality, system implementation and operational integration. In conclusion, the review generates an opinion on the validity of the models and the associated inputs for credit and counterparty risks, and for models authorized for use in determining capital requirements. It also generates an opinion on compliance with prudential regulations. Where necessary, the review is accompanied by recommendations. MODEL MAPPING The DRCCP maps out all Group internal rating models, clearly indicating their scope in terms of Group segments and entities, as well as their main features, including a general score derived from the annual model review characterizing the performance and freshness of each model (age/year of development). New models have been added to the system to better reflect the specific nature of certain scopes of operation. In particular, two rating models were introduced for small enterprises ( € 3 million < Revenue < € 10 million) in October 2017. These models draw on account behavior variables and the company’s financial data. Separate LGD models have also been introduced for commodities trade financing agreements and financing with listed equities. The following table lists the internal credit models used by the Group for risk management purposes and, where authorized by the supervisor, to calculate capital requirements for the Banque Populaire and Caisse d’Epargne networks, Natixis and its subsidiaries, Crédit Foncier and Banque Palatine.

The internal validation process for new models or for changes to existing models is broken down into three steps: a review of the model and its adequacy, conducted independently ● of the entities having worked on the model; a review by the Group Models Committee, comprised of ● quantitative experts (modeling specialists and validators) and business line experts who issue a technical opinion on the model; validation by the DRCCP Standards and Methods Committee, based ● on the technical opinion issued by the Group Models Committee, which decides to implement the necessary changes, particularly in terms of processes and operational adaptation. These changes are submitted, where applicable, to the European supervisory authority for prior approval, in accordance with Commission Delegated Regulation No. 529/2014 on changes of the Internal Ratings Based Approach used in determining capital requirements. After the completion of this governance process, internal control reports and statements of decisions are made available to Group management (and supervisory authorities for internal models used to determine capital requirements). Each year, a summary of the performances and adequacy of internal models is presented to the Risk Management Committee of the Group Supervisory Board. MODEL DEVELOPMENT PROCESS The DRCCP relies on a formalized process describing the main steps taken in developing any new model. This document, which serves as a guide for the entire documentation and validation process, is based on: a literary and general description of the model, indicating its scope ● of application (counterparty type, product type, business line, etc.), the main assumptions on which it is based, and any aspects not covered; a descriptive diagram summarizing how the ultimately chosen ● model works, indicating the various inputs, processes and outputs; a detailed description of the modeling steps and approach: ● setting up the working environment, - building a modeling sample, - creating samples, out-of-sample tests and out-of-time tests, - where applicable, comparing proposed models, where applicable, - justifying the choice of model (expert opinions, level of - discrimination, stability, consistency, robustness, etc.); a literary description of the model’s main risk factors. ● Internally developed models are required to meet strict risk discrimination and qualification criteria.

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Registration document 2018