BPCE - 2019 RISK REPORT Pillar III

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MARKET RISKS

MARKET RISK MEASUREMENT METHODS

Stress tests

Stress tests are calibrated according to severity and occurrence levels, which are consistent with portfolio management objectives: Trading book stress tests are calibrated over a 10-day period and a 10-year probability of occurrence. They are based on: historical scenarios, which reproduce changes in market • conditions observed during past crises, their impacts on current positions and P&Ls. They can be used to assess the exposure of the Group’s activities to known scenarios. Eleven historic stress tests have been in place since 2010; hypothetical scenarios, which involve simulating changes in • market conditions in all activities based on plausible assumptions concerning the dissemination of an initial shock. These shocks are based on scenarios defined according to economic criteria (real estate crisis, economic crisis, etc.), geopolitical considerations (terrorist attacks in Europe, toppling of a regime in the Middle East, etc.) or other factors (bird flu, etc.). Six theoretical stress tests have been in place since 2010. The Group has established an organizational structure tasked with independent price verification (IPV) through: creation of a Group valuation team in the Market Risk • department; Group governance covering the IPV system. • The Valuation Team is responsible for: meeting regulatory requirements and implementing said • requirements while assessing their impacts on the production and verification of new indicators; standardizing and harmonizing the production, certification and • communication of market inputs used in valuation processes; Independent price verification

Banking book stress tests are calibrated over a longer period in line with the banking book’s management periods: a bond stress test calibrated using a mixed • hypothetical-historical approach that reproduces a stress on European sovereigns (similar to the 2011 crisis); a bond stress test calibrated using a mixed • hypothetical-historical approach that reproduces a stress on corporates (similar to the 2008 crisis); an equity stress test calibrated over the 2011 historical period, • applied to equity investments for the purpose of the liquidity reserve; a private equity and eeal estate stress test, calibrated over the • 2008 historical period, applied to the private equity and real estate portfolios. The various stress tests are subject to limits adapted by each institution, which are monitored through recurring controls and regular reports.

coordinating and overseeing valuation processes group-wide, • in order to guarantee the convergence of IPV methods and principles; harmonizing fair value level processes across the Group. • Group governance is based in particular on: a supervision system centered on the Group Valuation • Committee and the Group Fair Value Level Committee; a body of procedures, including the Group IPV procedure, • which explains the validation and escalation system.

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RISK REPORT PILLAR III 2019 | GROUPE BPCE

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