BPCE - 2018 Risk report / Pillar III

5 CREDIT RISK

Credit risk management

Credit policy The overall risk policy is governed in particular by the risk appetite system, structured around the definition of the level of risk established by the Supervisory Board and risk appetiteindicators. The balance between profitability and risk tolerance is reflected in Groupe BPCE’s risk profile and is written into the Group’s risk managementpolicies. Groupe BPCE does not conduct business unless it has the associated risks strictly under control, nor does it exercise proprietary trading Rating policy Credit risk measurementrelies on internal rating systems adapted to each categoryof customerand transaction.The Risk, Complianceand PermanentControl division is responsiblefor defining and controlling the performance of these rating systems. Groupe BPCE applies an internal rating methodology,shared by both networks and the main subsidiaries (specific to each customer The system of internal caps used across the Group, which are lower than the regulatory caps, is applied to all Group entities. Likewise, the internal caps system used by the institutions is lower than or equal to the Group internal caps, and is applied to all entities of the Banque Populaireand Caisse d’Epargne networks. A groupwide set of limits has also been established for the major asset classes, major counterpartygroups within each asset class, and exposure levels for countries and industries. These limits apply to all Group institutions. The risk supervision mechanisms have been strengthened since the establishmentof the general credit risk policy for the Group, as well as the risk policy specific to corporates. Lastly, risk supervisionis adapted to each sector via a monthly sector watch, which is a responsibilitysharedwith all Group institutions.The sector watch has resulted in policies setting forth recommendations for all Group institutionson “at-risk”sectors. On behalf of the Group Risk Management and Compliance Committee, the DRCCP measures and verifies that these risk supervision mechanisms (individual and topical limits) are correctly implementedat each institution. The Group SupervisoryBoard is kept informedas Group internallimits are monitored, and of any breaches of the limits defined in accordance withthe risk appetiteframework. Caps and limits

activities. Activities with high risk-reward profiles are strictly controlled. From a structural standpoint,Groupe BPCE’s business model incurs a lower-than-average cost of risk for the French market. In general, Groupe BPCE’s credit approval process is based first and foremost on the customer’s ability to repay the loan, i.e. the customer’scapitalflows, with clearly identified sources and channels.

segment), for individual and professionalretail customers, as well as for corporate customers, “real estate professionals”, “central banks and other sovereignexposures”,“centralgovernments”,“public-sector and similar debt” and “financial institutions” segments. As of end-2018, the project finance rating system is now applied

groupwide.

METHOD USED TO ASSIGN OPERATIONAL LIMITS ON INTERNAL CAPITAL Groupe BPCE’s risk appetitedefines a set of limits used to oversee the allocation of capital associated with securitization exposures, with respect topotentialand pastvolatilityon this point. The quarterlyGroup risk dashboardis used to monitorconsumptionof RWA in the Group’s main asset classes: it compares any differentials in terms of changes between gross exposures and consumption of RWA. By using these systems, the Group is able to accurately monitor the change in capital needed to cover risks in each asset class, while also observing anychanges inthe quality of the asset classes in question. CORRELATION RISK POLICY Correlation risk is governed by a special decision-making process, where a counterparty offers its own shares as collateral. A top-up clause is systematically requiredon such transactions. For wrong-wayrisk, usually associatedwith collateralswaps between credit institutions, BPCE’s liquidity reserve procedure defines this criterion as follows: “the counterpartyto the repo and the securities received as collateral for that repo shall not be included in the same regulatory group.” However, these transactions may be reviewed on a case-by-case basis, under a special decision-makingprocess, where the collateral consistsexclusively of retail loans for residential real estate.

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Risk Report Pillar III 2018