BPCE - 2019 RISK REPORT Pillar III

5

CREDIT RISKS

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 distinction is made between guarantees having an actual impact on collections in the event of hardships and guarantees recognized by the supervisory authority in the weighting of exposures used to reduce capital consumption. For example, a personal and joint guarantee provided in due form by a company director who is a customer of the Group, and collected in

accordance with regulations, may be effective without being eligible as a statistical risk mitigation factor. In some cases, the Group’s institutions choose, in addition to employing risk mitigation techniques, to take opportunities to sell portfolios of disputed loans, particularly when the techniques used are less effective or non-existent. Credit derivatives are also used to reduce risks, and apply almost exclusively to the Corporate customers asset class (and mainly Natixis).

Definition of guarantees

reduce the credit risk incurred on an exposure, given the rights • of the institution subject to exposure, in the event of default or other specific credit events affecting the counterparty; obtain the transfer of ownership of certain amounts or assets. • A personal guarantee is collateral that reduces the credit risk on an exposure, due to the commitment provided by a third party to pay a set amount if the counterparty defaults or due to any other specific event.

A real guarantee involves one or more solidly measured movable or immovable assets that belong to the debtor or a third party. This guarantee consists of granting the creditor a real right to said asset (mortgage, pledge of real property, pledge of listed liquid securities, pledge of listed liquid merchandise with or without divestiture, pledge, third party guarantee, etc.). The effect of this collateral is to:

Accounting recognition under the standardized or IRB approach

Under the standardized approach: Personal guarantees and real guarantees are accounted for, subject to eligibility, using an enhanced weighting of the guarantee portion of the exposure. Real guarantees such as cash or liquid collateral are deducted from the gross exposure. Under the IRB approach: Excluding retail customers, real guarantees are taken into account, subject to eligibility, by decreasing the Loss Given Default applicable to the

transactions. Personal guarantees are recognized, subject to eligibility, by substituting a third party’s PD with that of a guarantor. Retail customers subject to A-IRB approach: Excluding retail customers, real guarantees are taken into account, subject to eligibility, by decreasing the Loss Given Default applicable to the transactions.

Conditions for the recognition of guarantees

Articles 207 to 210 of Capital Requirements Regulation (CRR) No. 575/2013 set out the conditions for the recognition of guarantees, in particular: the credit quality of the obligor and the value of the collateral • shall not have a material positive correlation. Securities issued by the obligor shall not qualify as eligible collateral; the institution shall properly document the collateral • arrangements and have in place clear and robust procedures for the timely liquidation of collateral; the institution shall have in place documented policies and • practices concerning the types and amounts of collateral accepted;

the institution shall calculate the market value of the collateral, • and revalue it accordingly, whenever it has reason to believe that a significant decrease in the market value of the collateral has occurred. Risk diversification is one technique for mitigating credit risk. In practice, individual or topical caps and limits are defined, thus reducing the bank’s sensitivity to risks deemed excessive, either individually or industry-wide, in the event of a major incident. Risk supervision mechanisms 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 2019 | GROUPE BPCE

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