BPCE - 2018 Risk report / Pillar III

1 SUMMARY OF RISKS

Main risks and emerging risks

Main risks and emerging risks 1.4

Main risks Credit and counterpartyrisk: at € 1.3 billion in 2018, Groupe BPCE’s cost of risk decreased 6.1% compared to 2017. Average annual cost of risk (expressedin basis points versus customeroutstandingsat the start of the period) reacheda record low of 19 bp in 2018, down 1 bp from 2017. Market risks: market risk indicators are monitored and analyzed at various position aggregation levels, giving an overview of total exposure and risk consumption by risk factor. VaR and stress indicators were kept very low for the Group in 2018 (VaR of € 14.2 million at end-2018 and stress test at - € 95 million for the most adverse scenario). Groupe BPCE places great importanceon anticipatingand managing emergingrisks in today’s constantly changing environment. The international geopolitical environment is continuously under watch in light of the political instability and budget imbalances affecting certain geographic regions. In Europe, the rise of populism in many countries, tensions in Italy over the sustainability of the country’sdebt, and post-Brexitnegotiationswith the United Kingdom have brought risks to bear on the stability of the EuropeanUnion and its currency, generating risks forthe Group’sexposures. Ultra-low interest rates are weighing on the profitability of commercialbanking activities,due to the predominanceof fixed-rate home loans, and on life insurance activities as well. Interest rate hikes, already under way in the United States, hold great significance for GroupeBPCE, calling for preparationand diversificationof funding sources. Emerging risks

Operational risk: considering the nature of its businesses, 51% of Groupe BPCE’s operating losses fall into the Basel category “execution, delivery and process management”. Liquidity, interest rate and foreign exchange risks: Groupe BPCE maintaineda strong liquidity position over the course of 2018 thanks to robust coverage of stress scenarios. At December 31, 2018, liquidity reserves covered 160% of all short-term funding as well as short-termmaturities of MLT debt. Groupe BPCE also conducted an “Economic Value of Equity” review to ensure it would be able to incorporate future regulatory changes involving interest rate risk in the banking book. With the increasing digitization of the economy and banking transactionsat Group level, cyber-risksare on the rise for information systems and customersalike, calling for heightenedvigilancein order to anticipate and guard against hacking. Misconduct risk is monitored with operational risks and has been written into Compliance Charters, the Group code of conduct and ethics, and conflicts of interest managementsystems at all levels of Groupe BPCE. Regulatorydevelopmentsare another area of permanentsupervision, as the banking industry is subject to increasinglystrict requirements and close regulatory supervision. Climate change and Corporate Social Responsibility are a growing concern for financial institutions, as addressed in their risk managementpolicies(especiallyat BPCE), but also from a commercial standpoint inregards to demanding customer expectations.

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Risk Report Pillar III 2018