BPCE - 2018 Registration document

RISK REPORT Liquidity, interest rate and foreign exchange risks

6.9.4

Management of structural interest rate risk

OBJECTIVES AND POLICIES Structural interest rate risk (or overall interest rate risk) is defined as the risk incurred in the event of a change in interest rates due to all balance sheet and off-balance sheet transactions, except for – if applicable – transactions subject to market risks. This risk is an intrinsic component of the business and profitability of credit institutions. The objective of the Group’s interest rate risk management system is to monitor each institution’s maturity transformation level in order to contribute to the growth of the Group and the business lines while evening out the impact of any unfavorable interest rate changes on the value of the Group’s banking books and future income.

gap indicators that compare the amount of liability exposures ● against asset exposures on the same interest rate index and over different maturities. These indicators are used to validate the main balance sheet aggregates to ensure the sustainability of the financial results achieved. Gaps are calculated based on contractual debt schedules and the results of the common behavioral models for various indexes as well as for the fixed rate; sensitivity indicators measure the change in the net present value ● of a portfolio or projected net interest income where there are differences between the change in the market interest rate and the central scenario established quarterly by the Group’s economists. In addition to the Basel II regulatory indicator on the sensitivity of the balance sheet’s net present value to interest-rate shocks of +/-200 basis points, the Group has introduced sensitivity indicators on the net interest income of all its commercial banking activities. These indicators aim to estimate the sensitivity of its institutions’ results to uncertainties surrounding interest rates, business forecasts (new business and customer behavior) and sales margins. Instruments authorized to hedge this risk are strictly vanilla (non-structured), excluding written options and favoring accounting treatment that does not impact the Group’s consolidated results. Groupe BPCE also improved its oversight of interest rate risk in the banking book to ensure a dynamic multi-scenario approach, better suited to managing this risk. Future regulatory changes relating to IRRBB are also currently being added to the management system.

INTEREST RATE RISK OVERSIGHT AND MANAGEMENT SYSTEM

Structural interest rate risk is controlled by a system of indicators and limits defined by the Group Asset and Liability Management Committee. It measures structural risks on the balance sheet, excluding any kind of independent risk (trading, own accounts, etc.). The indicators used are divided into two approaches: a static approach that only takes into account on-balance sheet and off-balance sheet positions at a set date and a dynamic approach which includes commercial and financial forecasts. They can be classified into two sets:

QUANTITATIVE DISCLOSURES TABLE 83 – INTEREST RATE GAP ➡ Most of the Group’s interest rate gap is carried by retail banking and Insurance and primarily by the networks. This gap is relatively stable over time and complies with internal limits.

6

01/01/2019 au 31/12/2019

01/01/2020 au 31/12/2022

1/1/2023 to 12/31/2026

in billions of euros

Interest rate gap (fixed-rate)*

22.8

(20.3)

(20.4)

The indicator takes into account all asset and liability positions and floating-rate positions until the next interest rate reset date. *

Sensitivity indicators The sensitivity of the net present value of the Group’s balance sheet to a +/-200 bp variation in interest rates is much lower than the 20% regulatory limit. Groupe BPCE’s sensitivity to interest rate rises was -7.8% at December 31, 2018.

The change in the Group’s projected one-year net interest income calculated under four scenarios (increase in rates, decrease in rates, steepening of the curve, flattening of the curve) compared to the central scenario showed, at September 30, 2018, the decrease in rates to be the most adverse scenario, with expected losses of € 203 million year-on-year.

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Registration document 2018