BPCE - 2018 Registration document

RISK REPORT Securitization transactions

Securitization transactions 6.7

6.7.1

Regulatory framework and accounting methods

REGULATORY FRAMEWORK This section presents information on Groupe BPCE’s securitization activities in accordance with applicable definitions and treatments, as stipulated in Chapter 5 of the CRR. Prudential requirements relating to securitization positions are governed by Articles 242 to 266 of European Regulation No. 575/2013 (Capital Requirements Regulation – CRR) and are separate from conventional loans. The Group uses two methods to measure exposure to securitization risk: the standardized approach and the internal ratings-based approach with specific weighting categories. The CRR defines a securitization as a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having the following characteristics: the transaction results in significant risk transfer, in the case of ● origination; payments in the transaction or scheme are dependent upon the ● performance of the exposure or pool of exposures; the subordination of tranches determines the distribution of losses ● during the ongoing life of the transaction or scheme. In line with the Basel Committee’s end-2014 publications, the European Commission is working to restore simple, transparent and standardized (STS) securitization markets, without repeating the mistakes made before the 2008 financial crisis. The introduction of an STS market is a key component of the Capital Markets Union (CMU). The Union intends to strengthen the legislative framework introduced in the wake of the financial crisis, with the aim of better distinguishing between different types of securitization (STS securitizations versus complex, non-transparent and high-risk instruments) and applying a more risk-sensitive prudential framework. The Securitization Regulation, defining the new general framework for securitization and creating a clear set of criteria for Simple, Transparent and Standardized (STS) securitizations, as well as the related amendments to the CRR, were published in the Official Journal of the European Union on December 28, 2017, with an effective date of January 2019. However, the methods used to determine capital requirements in force in 2018 will continue to apply to pre-01/01/2019 issues throughout 2019. ACCOUNTING METHODS Securitization transactions in which Groupe BPCE is an investor (i.e. the Group invests directly in some securitization positions, provides liquidity, and is a counterparty for derivatives exposures or guarantees) are recognized in accordance with the Group’s accounting principles, as referred to in the notes to the consolidated financial statements.

Securitization positions are predominantly recorded under “Securities at amortized cost” and “Financial assets at fair value through other comprehensive income”. Securitization positions classified as “Securities at amortized cost” are measured after their initial recognition at amortized cost based on the effective interest rate. Any position booked to “Securities at amortized cost” is impaired under “Cost of credit risk” in respect of Stage 1 or Stage 2 expected credit losses following a significant increase in credit risk. Where a position booked to “Securities at amortized cost” is transferred to Stage 3 (defaulted exposures), the impairment is recorded under “Cost of credit risk” (Note 7.1.2 to the financial statements - “Change in gross carrying amounts and expected credit losses on financial assets and commitments”). If a position is sold, the Group recognizes capital gains or losses on disposal in profit or loss under “Net gains or losses resulting from derecognition of financial assets at amortized cost”, unless the debt is in default: in such case, it is booked to “Cost of credit risk”. Securitization positions classified as “Financial assets at fair value through other comprehensive income” are remeasured at their fair value at the closing date. Interest income accrued or received on debt instruments is recognized in income based on the effective interest rate under “Interest and similar income” in net banking income (NBI), while changes in fair value (excluding revenues) are recorded on a separate line in other comprehensive income under “Gains and losses recognized directly in other comprehensive income”. They are impaired in respect of Stage 1, 2 or 3 expected credit losses, in accordance with the same methodology used for positions classified as “Securities at amortized cost”. This impairment is recorded on the liabilities side of the balance sheet under other comprehensive income that may subsequently be reclassified to profit or loss, with a corresponding entry to “Cost of credit risk” on the income statement (Note 7.1.2 to the financial statements - “Change in gross carrying amounts and expected credit losses on financial assets and commitments”). If the position is sold, the Group recognizes the capital gains or losses on disposal in profit or loss under “Net gains or losses on financial instruments at fair value through other comprehensive income” unless the position is in Stage 3. In such case, the loss is recognized in “Cost of credit risk”. Securitization positions classified as “Financial assets at fair value through profit or loss” are measured at fair value, at both the initial recognition date and the reporting date. Changes in fair value over the period, interest, and gains or losses on disposals related to securitization positions are recognized in “Net gains or losses on financial instruments at fair value through profit or loss”. Synthetic securitizations such as Credit Default Swaps are subject to accounting recognition rules specific to trading derivatives (Note 5.2 to the financial statements - “Financial assets and liabilities at fair value through profit or loss”).

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Registration document 2018