BPCE - 2018 Risk report / Pillar III

CREDIT RISK Credit risk mitigation techniques

Credit risk mitigation techniques 5.3

Credit risk mitigation techniques are widely used within the Group and are divided into real guarantees and personal guarantees. A distinctionis made betweenguaranteeshaving an actual impact on collections in the event of hardships and guarantees recognized by the supervisoryauthorityin the weighingof exposuresused to reduce capital consumption. For example, a personal and joint guarantee providedin due form by a companydirector who is a customerof the Group, and collectedin accordancewith regulations,will be effective without being eligibleas a statistical risk mitigation factor. Definition of guarantees A real guarantee involves one or more solidly appraised movable or immovable assets that belong to the debtor or a third party. Such guarantees consist in granting the creditor a real right to said asset (mortgage, pledge of real property, pledge, third party guarantee,etc.). The effect of this collateral is to:

In some cases, the Group’s institutions choose, in addition to employing right mitigation techniques, to take opportunities to sell portfolios of disputed loans, particularly when the techniques used are less effectiveor non-existent. Credit derivatives are also used to reduce risks, and apply almost exclusively to the Corporate customers asset class (and mainly Natixis).

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reduce the credit risk incurred on an exposure, given the rights of ● the institutionsubject to exposure,in the event of default or other specific credit events affecting the counterparty; obtain the transfer of ownership of certain amountsor assets. ● A personal guarantee is collateral that reduces the credit risk on an exposure, due to the commitmentprovided by a third party to pay a set amount if the counterpartydefaults or due to any other specific event.

Accounting recognition under the standardized or IRB approach Under the standardized approach, personal guarantees and real guaranteesare accountedfor, subjectto eligibility,using an enhanced weighting of the collateral portion of the exposure. Real guarantees such as cash or liquid collateral are deducted from the gross exposure.

Default applicable to the transactions. Personal guarantees are recognized, subject to eligibility, by substituting a third party’s PD with thatof a guarantor. Under the A-IRB approach for retail customers, personal guarantees and real guarantees are recognized, subject to eligibility, by decreasing the Loss Given Default applicable to the transactions in question.

Under the IRB approach, excluding retail customers,real guarantees are recognized, subject to eligibility, by decreasing the Loss Given

Conditionsfor the recognition ofguarantees Articles 207 to 210 of Capital Requirements Regulation (CRR) No. 575/2013 set out the conditions for the recognition of guarantees, inparticular:

the institutionshall properly documentthe collateralarrangements ● and have in place clear and robust procedures for the timely liquidation of collateral; the institution shall have in place documented policies and ● practices concerningthe typesand amountsof collateral accepted; the institution shall calculate the market value of the collateral, ● and revalue it accordingly,wheneverit has reason to believe that a significant decrease in the market value of the collateral has occurred.

the credit quality of the obligor and the value of the collateralshall ● not have a material positive correlation. Securities issued by the obligor shallnot qualify as eligiblecollateral;

Risk diversification Risk diversification is one technique for mitigating credit risk. In practice, individual or topical limits are defined, thus reducing the bank’s sensitivity to risks deemed excessive, either individually or industry-wide,in the event of amajor incident.

Risk supervisionmechanisms can reduce risk exposures if the risk is deemed too high,thus also contributing to good risk diversification.

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Risk Report Pillar III 2018