BPCE - 2019 RISK REPORT Pillar III

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CREDIT RISKS

CREDIT RISK MANAGEMENT

The main initiatives undertaken in 2019 can be classified into one of five categories:

1. Risk policies and limits Two new risk policies on the funding of political parties and the food retail sector were defined and rolled out. Corporate and LBO risk policies were adjusted to incorporate the Leveraged Finance regulation. The Group’s risk appetite for this asset class was defined. During the take-over of Oney Bank, the risk policy for France was reviewed and validated. A Group collections policy was established, aimed at improving the efficiency of the collections process by strengthening organizational processes and improving oversight of operations. 2. Rating The ECB continued its TRIM (Targeted Review of Internal Models) with the examination of Retail and Small Enterprises (SE) models. Lastly, efforts were begun to improve the rating tool NIE. 3. Standards and tools The standard used to identify counterparties whose leverage ratio has been reached, in accordance with the Leveraged Finance regulation, was rolled out across all Group institutions. The provisioning standard for corporate customers was rolled out to all institutions, with an initial scope of application targeting customers on the Group watchlist (NPL guidance). The following standards were defined or reviewed: definition of early warning indicators (EWIs) needed to improve early detection of corporate hardships; • modification of thresholds for adding/removing customers from the Group watchlist to reflect Groupe BPCE’s significant capital enhancement in recent years; • enhancement of escalation criteria for obtaining central decisions on Group syndicated loans; • definition of criteria for qualifying exposures to an institution or asset class as high-risk (NPL guidance); • definition of haircuts applicable to the value of collateral held, to account for the duration and cost of forced sales (NPL guidance); • inclusion of the probationary period in the forbearance standard. • Preparatory work was continued to establish the new default standard: accounting impacts, functional impacts, software tool impacts, customer impacts. The default-NPL convergence will be carried out during the deployment phase. 4. Controls The credit risk Level 2 permanent control system was supplemented for the corporate asset classes. 5. Reporting Efforts to establish a syndicated loan report were continued, with the deployment of the syndication number assigned for the purposes of the ECB’s AnaCredit reporting. The LBO report requested by the ECB was rolled out groupwide. Efforts to improve the monthly Group exposures consolidation tool were initiated.

Credit risk supervision system

CAPS AND LIMITS The system of internal caps used across the Group, which are lower than the regulatory caps, is aimed at increasing the division of risks and is applied to all Group entities. The internal caps system used by the institutions is lower than or equal to the Group internal caps, and is applied to the Banque Populaire and Caisse d’Epargne networks and the subsidiaries. A Groupwide set of individual limits has also been established for the major counterparties as well as exposure levels for countries and industries. These limits apply to all Group institutions. The individual limits system in place, aimed at dividing up risks and making them individually acceptable in terms of each institution’s profits and capital position, i.e. without including the value of collateral, to define the maximum amount of acceptable risk for a given counterparty. The aim of this position is to neutralize the operational risk associated with the recognition of collateral and with execution in the event the institution is required to call in the collateral. Risk supervision is adapted to each sector via a monthly sector watch, which is a responsibility shared with all Group institutions. Sector policies and limits have been established for that purpose. On behalf of the Group Risk and Compliance Committee, the Risk division measures and verifies that these risk supervision mechanisms (individual and topical limits) are correctly implemented at each institution.

The Group Supervisory Board is kept informed as Group internal caps are monitored, and is notified of any breaches of limits defined in accordance with the risk appetite framework. METHOD USED TO ASSIGN OPERATIONAL LIMITS ON INTERNAL CAPITAL The quarterly Group risk dashboard is used to monitor consumption of risk-weighted assets in the Group’s main asset classes: it compares any differentials in terms of changes between gross exposures and consumption of RWA. By using these systems, the Group is able to accurately monitor the change in capital needed to cover risks in each asset class, while also observing any changes in the quality of the asset classes in question. CORRELATION RISK POLICY Correlation risk is governed by a special decision-making process, where a counterparty offers its own shares as collateral. A top-up clause is systematically required on such transactions. For wrong-way risk, usually associated with collateral swaps between credit institutions, BPCE’s liquidity reserve procedure defines this criterion as follows: “the counterparty to the repo and the securities received as collateral for that repo shall not be included in the same regulatory group.”

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RISK REPORT PILLAR III 2019 | GROUPE BPCE

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