BPCE - 2019 RISK REPORT Pillar III

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SECURITIZATION TRANSACTIONS

REGULATORY FRAMEWORK AND ACCOUNTING METHODS

Regulatory framework and accounting 7.1 methods

Regulatory framework and accounting methods

REGULATORY FRAMEWORK Two European regulations aimed at facilitating the development of the securitization market, preventing risks and ensuring the stability of the financial system, were published in the Official Journal of the European Union on December 28, 2017. The objective of both regulations is to govern securitization transactions in the European Union. REGULATION (EU) NO. 2017/2402 (1) Sets a general framework for securitization (the previous rules were spread out in three different directives and two regulations). Establishes appropriate due diligence, risk retention and transparency requirements for parties to securitization transactions, sets loan approval criteria, lays down requirements for selling securitizations to retail clients, and prohibits resecuritization. Also establishes a specific framework for STS (simple, transparent and standardized) securitization, by defining the criteria for transactions to meet in order to qualify as securitizations and the obligations arising from such qualification, such as the obligation to notify ESMA of securitization programs. REGULATION (EU) NO. 2017/2401 (2) Amends the provisions of Regulation (EU) No. 575/2013 pertaining to securitization, including in particular the prudential requirements applicable to credit institutions and investment firms acting as originators, sponsors or investors in securitization transactions. Deals in particular with: STS securitizations, and the method for calculating the • associated risk-weighted exposure amounts; The hierarchy of methods for calculating RWAs and • determining the related parameters; External credit assessments (performed by external rating • agencies). REGULATORY CAPITAL REQUIREMENTS Hierarchy of methods: securitization capital requirements are calculated in accordance with a hierarchy of methods applied in the order of priority set by the European Commission:

SEC-IRBA (Securitization Internal Ratings Based Approach): • uses the bank’s internal rating models, which shall have been approved beforehand by the supervisor. SEC-IRBA calculates regulatory capital requirements in relation to underlying exposures as if these had not been securitized, and then applies certain pre-defined inputs; SEC-SA (Securitization Standardized Approach): this method is • the last chance to use a formula defined by the supervisor, using as an input the capital requirements that would be calculated under the current Standardized Approach (calculates regulatory capital requirements in relation to underlying exposures – based on their class – and then applies the ratio of defaulted underlying exposures to the total amount of underlying exposures); SEC-ERBA (Securitization External Ratings Based Approach): • based on the credit ratings of securitization tranches determined by external rating agencies. If none of these three methods is applicable (SEC-IRBA, SEC-ERBA, SEC-SA), then the risk weight applied to the securitization is 1,250%. Note: Introduction of new risk inputs: maturity and thickness of the • tranche Higher risk weight floor: 15% (versus 7% previously) • Preferential regulatory treatment for STS securitization • exposures: The European regulation defining the new general framework for securitization and creating a clear set of criteria for Simple, Transparent and Standardized (STS) securitizations, as well as the related amendments to the CRR, were published in the Official Journal of the European Union on December 28, 2017, with an effective date of January 2019. However, the methods used to determine capital requirements in force in 2018 will continue to apply to pre-01/01/2019 issues throughout 2019. They will apply to all issues as from January 1, 2020. Risk weight floor lowered to 10% (versus 15%) – SEC-ERBA: STS differentiated risk weight table –

Accounting methods

Securitization transactions in which Groupe BPCE is an investor ( i.e. the Group invests directly in some securitization positions, provides liquidity, and is a counterparty for derivatives exposures or guarantees) are recognized in accordance with the Group’s accounting principles, as referred to in the notes to the consolidated financial statements.

Securitization positions are predominantly recorded under “Securities at amortized cost” and “Financial assets at fair value through other comprehensive income”. Securitization positions classified as “Securities at amortized cost” are measured after their initial recognition at amortized cost based on the effective interest rate. Any position booked to

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RISK REPORT PILLAR III 2019 | GROUPE BPCE

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