BPCE - 2019 Universal Registration Document

RISK REPORT

CREDIT RISKS

The Model Validation Charter encompasses all types of quantitative models, defines and specifies the duties and responsibilities of contributors involved throughout each model’s life cycle. It also specifies the conditions for delegating validation, within a specific scope, to another entity besides the Risk division validation team: the entity in question must have the necessary expertise, be independent of the team developing the model, and have appropriate validation governance. Under these rules, the validation of certain specific PD and LGD models, IMM models for counterparty risk, IMA and standard models for market risk and prudent valuation models has been delegated to the independent validation team at Natixis. The internal validation process for new models or for changes to existing models is broken down into three steps: a review of the model and its adequacy, conducted • independently of the entities having worked on the development of the model; The Risk division’s model validation tea reports to the Risk Governance department, which is independent of the Modeling department; a review by the Group Models Committee, comprised of • quantitative experts (modeling specialists and validators) and business line experts who issue a technical opinion on the model. This committee is chaired by the Head of Risk Management, Deputy Chief Executive Officer and member of the Executive Management Committee; validation by the Group RCCP Standards and Methods • Committee, based on the technical opinion issued by the Group Models Committee, which decides to implement the necessary changes, particularly in terms of processes and operational adaptation. These changes are submitted, where applicable, to the European supervisory authority for prior approval, in accordance with Commission Delegated Regulation No. 529/2014 on changes of the Internal Ratings Based Approach used in determining capital requirements. After the completion of this governance process, internal control reports and statements of decisions are made available to Group management (and supervisory authorities for internal models used to determine capital requirements). Each year, a summary of the performances and adequacy of internal models is presented to the Risk Management Committee of the Group Supervisory Board. The Group is also in the process of establishing a Model Risk Management (MRM) system aimed at assessing, streamlining, supervising and reporting model risk. Implementation of the new system is subject to an independent control presenting a high level of consistency. The principles of the system deal with the documentation, design, development, implementation, review, approval, ongoing supervision and use of models, all in the interest of ensuring their dependability. An MRM risk management policy has been defined to that end, aimed at promoting a clear understanding of how each model works, when and why it is used, and its strengths, weaknesses and limits. The policy will be gradually rolled out for each category of models in 2020, while expanding the scope of models subject to independent review. MODEL DEVELOPMENT PROCESS The Risk division relies on a formalized process describing the main steps taken in developing any new model. This document, which serves as a guide for the entire documentation and validation process, is based on:

a literary and general description of the model, indicating its • scope of application (counterparty type, product type, business line, etc.), the main assumptions on which it is based, and any aspects not covered; a descriptive diagram summarizing how the ultimately chosen • model works, indicating the various inputs, processes and outputs; a detailed description of the modeling steps and approach; • a literary description of the model’s main risk factors. • Internally developed models are required to meet strict risk discrimination and qualification criteria. These models will ultimately (as from January 1, 2021) incorporate the regulatory changes enacted by the European Banking Authority under its IRB Repair program, aimed at improving the comparability of risk parameters input to the models. REVIEW OF INTERNAL RATINGS-BASED MODELS The Groupe BPCE Risk division is responsible for reviewing the Group’s internal models whenever a new model is being developed or an existing model changed. It also performs the annual review of backtests on credit, market and ALM risk models. The validation team conducts independent analyses in compliance with a charter and procedures that describe interactions with the modeling entities and the steps of the review. This review is based on a set of qualitative and quantitative criteria, and mainly addresses the following points: documentation; • methodology, including the validity of assumptions; • performance; • robustness; • compliance with regulations. • The level of detail in the review is adjusted for the type of work examined. In any event, it must at least include a document review focusing on the quantitative aspects of rating systems. For a new model or a major change to an existing model, in addition to this review, the computer codes are checked and additional tests are run (comparative calculations). The scope of the Validation division’s involvement may be expanded before and after an investigation of data quality, system implementation and operational integration. In conclusion, the review generates an opinion on the validity of the models and the associated inputs for credit and counterparty risks, and for models authorized for use in determining capital requirements. It also generates an opinion on compliance with prudential regulations. Where necessary, the review is accompanied by recommendations. MODEL MAPPING The Risk division maps out all Group internal rating models, clearly indicating their scope in terms of Group segments and entities, as well as their main features, including a general score derived from the annual model review characterizing the performance and freshness of each model (age/year of development).

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE