BPCE - 2018 Risk report / Pillar III

1 SUMMARY OF RISKS Regulatory changes

Regulatory changes 1.3 

Several major regulatory changes were on the horizon by the end of 2018 onboth the international and European fronts. At the international level, the Basel Committee on Banking Supervision (BCBS) finalized its recalibration of the regulatory framework governing market risks – the FundamentalReview of the Trading Book (FRTB) – and announced it would be overseeing the transpositionof the entire Basel III reform, both in terms of content and timeline. The “Finalizationof Basel III” involvesthe revisionof methodsused to measure credit risk, CVA risk and operational risk, as well as the application of an RWA floor. The finalization was published in December 2017 and calls for all reforms, including the FRTB, to take effect in2022.

The BCBS also commented on the risks of leverage ratio window dressing, and stated that it was planning a revision for the purposes of modifying disclosure requirements, particularly for securities financingtransactionsand derivatives. There were also several developmentsat the Europeanlevel, including the review of the Risk ReductionMeasures(RRM) package relating to draft directivesand regulations(CRR2, CRD5, BRRD2,SRMR2)and the introductionof prudentialbackstops to CRR. Other developmentsare in progress, but are unlikely to be completed before the end of the legislative term, such as the review of the EuropeanSupervisoryAuthorities(ESAs), harmonizationof regulations governing investment firms, transposition of the Basel III package (draft CRR3/CRD6) and review of the European Deposit Insurance Scheme (EDIS). Basel III, the deduction of software investments from capital was eliminated (although prudential treatment of software investments will continue to be governed by the EBA), and repo/trade finance/factoring activities will receive more favorable treatment with respectto the NSFR. A compromisewas reached regardingleverageratio windowdressing, a practice labeled unacceptable by the BCBS: the calculation will remain unchanged, with banks simply required to submit additional reports (on average daily) on securities financing transactions(SFTs) and derivativesto supervisors(2019 program). It should be noted that regulatory texts refer to the implementation of EBA RTS (Regulatory Technical Standards) or ITS (Implementing Technical Standards)for certainsubjects.

Review ofRisk Reduction Measures (“Banking Package”) The Austrian Presidency of the European Union submitted a compromise to the Committee of Permanent Representatives (COREPER) and to the ECOFIN Council comprising the Economy and Finance Ministers of the EU Member States on November 30 and December4, respectively.

Pending the plenary vote on the draft CRR2, CRD5, BRRD2 and SRMR on an as-yet unannounceddate, the financial center is expecting to obtain a certain number of positive concessions (still to be confirmed): the Danish Compromise (on the weighting of insurance investmentsby banks) has been extended, fairness was introducedin terms of subordinationrequirements(re: Resolution)between the 37 Top Tier Banks and GSIBs, a reporting requirement was established only with respect to market risk (FRTB) before the finalization of InvestmentFirms (IFs) The Austrian Presidency compromise, aimed at ensuring fair competition between banks and IFs, has been hotly contested not only by the United Kingdom – still at the negotiation table despite Brexit – but also by Germany and Luxembourg. Non-Performing Loans (NPLs) The Commission has proposed a new regulation which would set a mandatory minimum provision for any newly originated loans that become non-performing. Legislators want to move very quickly, notably to finalize efforts to reduce risks in Europe (specificallyto reduce NPL books), thus paving the way for progress on the European Deposit Insurance Scheme

France’s position is that the text should not be adopted until Brexit negotiations have been finalized.

(EDIS). As a result, the proposed regulation on NPLs is likely to be adopted in its current form (or close): the Council and Parliament wish to clarify the principle of line-by-line application for each transaction (and not at book level) and the implementationof the text at the effective date (as opposed to retroactively at the

publication date of the draft version).

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Risk Report Pillar III 2018