BPCE - 2019 RISK REPORT Pillar III

CREDIT RISKS

CREDIT RISK MANAGEMENT

However, these transactions may be reviewed on a case-by-case basis, under a special decision-making process, where the collateral consists exclusively of retail loans serving to finance residential real estate. CREDIT RISK SUPERVISION Within its remit as applied to credit risk supervision, the Risk division: presents the Management Board and Supervisory Board with • a risk appetite framework for the Group and ensures its implementation and roll-out at each major entity; helps draw up risk policies on a consolidated basis, examines • overall risk limits, takes part in discussions on capital allocation and ensures that portfolios are managed in accordance with these limits and allocations; helps the Groupe BPCE Management Board to identify • emerging risks, the concentration of risk and other adverse developments, and to devise strategy and adjust risk appetite; performs any specific analyses and stress tests with the goal of identifying areas of risk and the Group’s resilience under various predetermined shock scenarios; defines and implements risk taking and management • standards and methods for consolidated risk measurement, risk mapping, risk-taking approval, risk control and reporting, and compliance with laws and regulations; assesses and controls the level of credit risk across the Group; • conducts permanent supervision, including detecting and • resolving limit breaches and centralized forward-looking risk reporting on a consolidated basis; conducts controls – or ensures through the principle of • subsidiarity that controls are conducted – to verify that the operations and internal procedures of Group companies comply with legal, professional, or internal standards applicable to banking, financial and insurance activities; performs Level 2 controls of certain processes used to • prepare financial information and implements a Group Level 2 permanent risk control system; manages risk information systems in accordance with an • annual IT plan, working closely with the IT departments, while defining the standards to be applied for the measurement, control, reporting and management of credit risks. The different levels of control at Groupe BPCE operate under the supervision of the Risk division, which is also responsible for consolidated summary reporting to the various decision-making bodies and committees, in particular the Group Watchlist and Provisions Committee. The aim of risk supervision is to: improve the identification of various degrees of situations that • are stressed or becoming stressed, which may worsen and veer into default. A set of indicators used to identify incidents on customer accounts (past due payments, irregular payments, etc.) or external events (rejected notes, external ratings, customer life events) contributes to this supervisory system. This system is currently being strengthened with the addition of new supervision triggers under the “Bad Loans” project; enhance the quality of customer data through a data quality • supervision and improvement system, in addition to seeking out high-quality exposures;

use observed results to adjust the framework of permanent • controls performed by each institution, based on its own macro-level risk mapping. The business line heads in charge of the content of the Level 2 permanent control framework and the heads of periodic control can then work together to cross-check the risk areas identified from the results of their own investigations, and complete: the self-assessments of Groupe BPCE institutions, – decisions on how to change the control systems within their – remit. The Credit Risk business line, which is in charge of the content of the Level 2 permanent control framework, receives summaries of the audit reports from the periodic control teams, and can also determine whether the Level 2 periodic control framework needs to be adjusted for the institutions. Risk prevention and monitoring at Groupe BPCE focuses on the quality of information, which is a heightened concern under the requirements of regulation BCBS 239 and is necessary for proper risk assessment, as well as the amount of risk taken and changes in these risks. The application of the “gross leverage ratio” to non-investment grade corporate counterparties (revenue >€50 million) strengthens oversight of potential overindebtedness. The supervision teams are responsible for ensuring that the sector-based watch is updated by focusing on sectors of activity identified as high-risk and for analyzing portfolios to help identify the main concentrations of risk. This system is enhanced with a set of industry-based limits. High-risk loans and counterparties (on the watchlist) and the provisioning policy for the main risks shared by several entities (including Natixis) are regularly examined by the Group Watchlist and Provisions Committee. Groupe BPCE performs three main types of stress test on credit risk: the EBA stress test, performed every two years, aimed at • testing the resilience of credit institutions to simulated shocks, and comparing their results. The outcome of the EBA stress test may result in stronger capital requirements or other mandatory measures imposed by the supervisor, which has not been the case for Groupe BPCE to date; Groupe BPCE’s internal stress test. This test is performed • once a year and its results are applied to ICAAP and the Recovery Plan. It covers several more scenarios than the EBA stress test, and includes changes in projections on the entire balance sheet. The baseline scenario is also used to challenge Groupe BPCE’s medium-term plan. For the purposes of the Recovery Plan, an additional test is conducted on the real estate portfolio; specific stress tests. These tests can be run at an external • request (supervisor) or internal request; There is a stress test for the real estate professionals portfolio, and a stress test will be conducted in early 2020 on leveraged buyouts, later a stress tests will be performed on renewable energy project financing operations. The results of these stress tests have always demonstrated Groupe BPCE’s resilience to the shocks simulated in the test scenarios They are consistently used with the aim of learning as much as possible from crisis simulations.

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RISK REPORT PILLAR III 2019 | GROUPE BPCE