BPCE - 2018 Risk report / Pillar III

5 CREDIT RISK

Risk measurement and internal ratings

TRIM - Retail exposures The “Retail exposures” TRIM took place from February 2018 to May 2018 and covered Probability of Default (PD) models for retail exposures, targeting individual customers, as well as Exposure at Default (EAD) and Loss Given Default (LGD) models for all retail exposures(professionaland individualcustomers).This reviewcovered the Banque Populaireand Caisse d’Epargnenetworks.Note: a request for a material change in LGD and EAD models was made. In its final decision letter, the ECB validatedthe use of PD, LGD and EAD models for the entire audited scope and confirmed the material change in LGD and EAD models. IMPACTS ON THE AMOUNT OF GUARANTEES THE INSTITUTION IS REQUIRED TO GIVE IN THE EVENT ITS CREDIT RATING IS DOWNGRADED The CRR and the Delegated Act require institutions to report to the competent authorities any contracts the conditions of which lead to additionalliquidity outflows followinga material deteriorationof the credit qualityof the institution( e.g. a downgradein its externalcredit assessment by three notches). The institution shall regularly review the extent of this deteriorationin light of what is relevant under the contracts it has entered into and shall notify the result of its review to the competent authorities (CRR 423.2/AD 30.2). The competent authorities decide the weighting to be assigned to contractsdeemed to have amaterial impact. For contracts containing early exit clauses on master agreements (frameworkagreementsbetweenthe bank and a counterpartyfor OTC derivative transactions without collateral), the early termination clause allows one counterparty to terminate the contract early

following the deterioration of the credit quality of the other counterparty. Accordingly, the number of early terminations generated by creditqualitydeterioration shall be estimated. It was agreed that the Group would measure outflows generated by reviewingall the Group’s master agreementson the OTC market with CSA, in order to assess the amount of the deposit/collateralrequired followinga downgradeof three notchesin the institution’slong-term credit rating by the three rating agencies (Moody’s, S&P, Fitch). The calculation also includes the amount of the deposit/collateral required following a downgrade of one notch in the institution’s short-term credit rating, with the Group considering such a downgrade inevitable if the institution’s LT credit rating is downgradedthree notches. At Groupe BPCE level, the calculationcovers BPCE SA group, Natixis, Crédit Foncier and their funding vehicles: BP CB, GCE CB, BPCE SFH, FCT HL, SCF and VMG. Some intragroup contracts generate outflows at the individual institution level, but are neutralized at the Groupe BPCE consolidatedlevel. The Group uses aconservative approach in its calculation: the impact for each contract is the maximumamount between the ● three rating agencies between a 1-notch downgrade in the ST rating and a 3-notch downgrade in the LT rating; the amount of ratings triggers reportedis the sum of all impacts of ● a one-notch downgrade in the ST rating and a three-notch downgrade inthe MLT rating; the assumption is made that all external ratings are downgraded ● simultaneously by the 3agenciesand for all ratedentities; as the national competent authority has not issued a ● recommendation,a weight of 100% is applied to reportedoutflows for the calculation of the LCR.

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Risk Report Pillar III 2018