BPCE - 2018 Risk report / Pillar III

1 SUMMARY OF RISKS Risk factors

The hedging strategies implemented by Groupe BPCE do not eliminate all risk of loss. Groupe BPCE may incur losses if any of the different hedging instrumentsor strategiesthat it uses to hedge its exposureto various kinds of risks prove ineffective. Many of its strategies are based on historic market trends and correlations.For example, if Groupe BPCE holds a long position in an asset, it may hedge the risk by taking a short position in another asset whose past performance offsets the changes in the long position.However,Groupe BPCE may only have a partial hedge, or these strategiesmay not effectivelymitigateits total risk exposure in all market configurations or may not be effective against all types of future risks. Any unforeseentrend in the markets may also reduce the effectiveness of Groupe BPCE’s hedging strategies. Moreover, the accounting recognition of gains and losses from ineffective hedges may increase the volatility of results published by Groupe BPCE. Changes in the fair value of Groupe BPCE’s portfolios of securities and derivative products, and its own debt, are liable to have an adverse impact on the carrying amount of these assets and liabilities, and as a result on Groupe BPCE’s net income and equity. The carrying amount of Groupe BPCE’s securities, derivative products and other types of assets, and of its own debt, is adjusted (in the balance sheet) at the date of each new financial statement. These adjustmentsare predominantlybased on changes in the fair value of assets and liabilities during an accounting period, i.e. changes taken to profit or loss or directly to other comprehensiveincome. Changes recorded in the income statement, but not offset by corresponding changes in the fair value of other assets, have an impact on net banking income and thus on net income. All fair value adjustments have an impact on equity and thus on Groupe BPCE’s capital adequacy ratios. The fact that fair value adjustments are recorded over an accountingperiod does not mean that additionaladjustments will not benecessaryin subsequent periods. Groupe BPCE’s revenues from brokerage and other activities associated with fee and commission income may decrease in the event of market downturns. A market downturn is liable to lower the volume of transactions (particularly financial services and securities transactions) executed by Groupe BPCE entities for their customers and as a market maker, thus reducing net banking income from these activities. A market downturn is liable to lower the volume of transactions executed by Groupe BPCE for its customers and the corresponding fees, thus reducing revenues earned from these activities. Furthermore, as management fees invoiced by Groupe BPCE entities to their customers are generally based on the value or performance of portfolios, any decline in the markets causing the value of these portfolios to decrease or generating an increase in the amount of redemptions would reduce the revenues earned by these entities through the distribution of mutual funds or other investment products (for the Caisses d’Epargne and the Banque Populaire banks) or throughasset managementactivities(for Natixis).

Even if there is no market decline, in the event mutual funds and other Groupe BPCE products underperformthe market, redemptions may increase and inflows decrease as a result, with a potential corresponding impact on revenues from the Group’s asset management business, which could adversely impact the financial position of Groupe BPCE. TRADING AND BANKING BOOK ILLIQUIDITY RISKS Extended market declines may reduce market liquidity and thus make it difficult to sell certain assets, in turn generating material losses. In some of Groupe BPCE’s activities, extended market trends (in particulardownturnsin asset prices) may reduce the level of business on the market or its liquidity. Such trends may result in material losses if Groupe BPCE is unable to unwind positions whose value is falling when necessary and incurs continuous losses on these positions. Thismay bethe case, forexample, forassets heldby Groupe BPCE in markets that naturally tend to be illiquid. The valuation of these assets, which are not traded on stock exchangesor other public markets ( e.g. derivatives traded between banks), is determined using models rather than official quoted prices. Groupe BPCE has high exposures to these assets and, given the number of open positions, any extended market decline may generate material losses. It is difficult to monitor declines in the prices of such assets and, consequently, Groupe BPCE runs the risk of incurring unexpected losses onhigh volumes of OTCderivatives. affecting its profitability and business continuity. Credit ratings have a significantimpact on the liquidity of BPCE and its affiliates active in the financial markets (including Natixis). A ratings downgrademay affect the liquidity and competitive position of BPCE or Natixis, increase borrowingcosts, limit access to financial markets and trigger obligations under some bilateral contracts governing trading, derivative and collateralizedfunding transactions, thus affecting its profitability and business continuity. BPCE and Natixis’ unsecured long-term funding cost is directly linked to their respectivecredit spreads(the yield spread over and above the yield on government issues with the same maturity that is paid to bond investors), which in turn are heavily dependent on their ratings. An increase in credit spreads may materially raise BPCE and Natixis’ fundingcost. Shifts in credit spreads are correlatedto the market and sometimes subject to unforeseen and highly volatile changes. Credit spreads are also influenced by market perception of issuer solvency. Moreover, credit spreads may be caused by changes in the price of credit default swaps backed by certain BPCE orNatixis debt securities. This price may in turn be influenced by the credit quality of these bonds and a number of other market factors over which BPCE and Natixis have nocontrol. CREDIT SPREAD RISKS BPCE must maintain high credit ratings to avoid

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Risk Report Pillar III 2018