BPCE - 2018 Registration document

RISK REPORT Credit risk

TRIM - Retail exposures The “Retail exposures” TRIM took place from February 2018 to May 2018 and covered Probability of Default (PD) models for retail exposures, targeting individual customers, as well as Exposure at Default (EAD) and Loss Given Default (LGD) models for all retail exposures (professional and individual customers). This review covered the Banque Populaire and Caisse d’Epargne networks. Note: a request for a material change in LGD and EAD models was made. In its final decision letter, the ECB validated the use of PD, LGD and EAD models for the entire audited scope and confirmed the material change in LGD and EAD models. Impacts on the amount of guarantees the institution is required to give in the event its credit rating is downgraded The CRR and the Delegated Act require institutions to report to the competent authorities any contracts the conditions of which lead to additional liquidity outflows following a material deterioration of the credit quality of the institution ( e.g. a downgrade in its external credit assessment by three notches). The institution shall regularly review the extent of this deterioration in light of what is relevant under the contracts it has entered into and shall notify the result of its review to the competent authorities (CRR 423.2/AD 30.2). The competent authorities decide the weighting to be assigned to contracts deemed to have a material impact. For contracts containing early exit clauses on master agreements (framework agreements between the bank and a counterparty for OTC derivative transactions without collateral), the early termination clause allows one counterparty to terminate the contract early following the deterioration of the credit quality of the other Information provided in respect of IFRS 7 Credit risk mitigation techniques are widely used within the Group and are divided into real guarantees and personal guarantees. A distinction is made between guarantees having an actual impact on collections in the event of hardships and guarantees recognized by the supervisory authority in the weighing of exposures used to reduce capital consumption. For example, a personal and joint guarantee provided in due form by a company director who is a customer of the Group, and collected in accordance with regulations, will be effective without being eligible as a statistical risk mitigation factor. In some cases, the Group’s institutions choose, in addition to employing right mitigation techniques, to take opportunities to sell portfolios of disputed loans, particularly when the techniques used are less effective or non-existent. Credit derivatives are also used to reduce risks, and apply almost exclusively to the Corporate customers asset class (and mainly Natixis). 6.5.3

counterparty. Accordingly, the number of early terminations generated by credit quality deterioration shall be estimated. It was agreed that the Group would measure outflows generated by reviewing all the Group’s master agreements on the OTC market with CSA, in order to assess the amount of the deposit/collateral required following a downgrade of three notches in the institution’s long-term credit rating by the three rating agencies (Moody’s, S&P, Fitch). The calculation also includes the amount of the deposit/collateral required following a downgrade of one notch in the institution’s short-term credit rating, with the Group considering such a downgrade inevitable if the institution’s LT credit rating is downgraded three notches. At Groupe BPCE level, the calculation covers BPCE SA group, Natixis, Crédit Foncier and their funding vehicles: BP CB, GCE CB, BPCE SFH, FCT HL, SCF and VMG. Some intragroup contracts generate outflows at the individual institution level, but are neutralized at the Groupe BPCE consolidated level. The Group uses a conservative approach in its calculation: the impact for each contract is the maximum amount between the ● three rating agencies between a 1-notch downgrade in the ST rating and a 3-notch downgrade in the LT rating; the amount of ratings triggers reported is the sum of all impacts of ● a one-notch downgrade in the ST rating and a three-notch downgrade in the MLT rating; the assumption is made that all external ratings are downgraded ● simultaneously by the 3 agencies and for all rated entities; as the national competent authority has not issued a ● recommendation, a weight of 100% is applied to reported outflows for the calculation of the LCR. DEFINITION OF GUARANTEES A real guarantee involves one or more solidly appraised movable or immovable assets that belong to the debtor or a third party. Such guarantees consist in granting the creditor a real right to said asset (mortgage, pledge of real property, pledge, third party guarantee, etc.). The effect of this collateral is to: reduce the credit risk incurred on an exposure, given the rights of ● the institution subject to exposure, in the event of default or other specific credit events affecting the counterparty; obtain the transfer of ownership of certain amounts or assets. ● A personal guarantee is collateral that reduces the credit risk on an exposure, due to the commitment provided by a third party to pay a set amount if the counterparty defaults or due to any other specific event. ACCOUNTING RECOGNITION UNDER THE STANDARDIZED OR IRB APPROACH Under the standardized approach, personal guarantees and real guarantees are accounted for, subject to eligibility, using an enhanced weighting of the collateral portion of the exposure. Real guarantees such as cash or liquid collateral are deducted from the gross exposure.

Credit risk mitigation techniques

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Registration document 2018