BPCE_PILLAR_III_2017

7 SECURITIZATION TRANSACTIONS

Regulatory framework and accounting methods

Regulatory framework and accounting 7.1 methods

Regulatory framework This section presents information on Groupe BPCE’s securitization activities in accordance with the applicable definitions and treatments, as stipulated in Chapter5 of the CRR. Prudential requirements relating to securitization positions are governed by Articles 242 to 266 of European Regulation No. 575/2013 (Capital Requirements Regulation – CRR) and are separate from conventional loans. The Group uses two methods to measure exposure to securitization risk: the standardized approach and the internal ratings-based approach with specific weighting categories. The CRR defines securitization as a transaction or mechanism whereby the credit risk inherent to an exposure or basket of exposures is divided into tranches with the following characteristics: the transactionresults in the transferof substantialrisk, in the case ● of origination; paymentsmade under the transactionor mechanismdepend on the ● performance of the exposure or basket of underlying exposures; Accounting methods Securitizationtransactionsin which Groupe BPCE is an investor ( i.e. the Group invests directly in some securitization positions, provides liquidity, and is a counterparty for derivatives exposures or guarantees) are recognized in accordance with the Group’s accountingprinciples, as referred to in the notes to the consolidated financial statements under “Accounting principles and measurement methods”. Securitization positions are mainly recorded under “Loans and receivables” and “Available-for-sale financial assets”. Securitization positions classified as “Loans and receivables” are measured after their initial recognition at amortized cost using the effectiveinterest rate method and, if necessary,may be subject to an impairment that is recorded under cost of risk. Securitization positions classified as “Available-for-sale financial assets” are remeasuredat their fair value at the closing date. Interest income accrued or received on debt instruments is recognized in income based on the effective interest rate under “Interest or similar income” in net banking income (NBI), while changes in fair value (excluding revenues) are recorded on a separate line in shareholders’ equity under the heading “Gains and losses recognized directly in other comprehensive income”. Whenevera decline in the fair value of an available-for-salefinancial asset has been recognizeddirectly on a separate line in shareholders’ equity under the heading “Gains and losses recognized directly in other comprehensive income”, and there is subsequently objective evidenceof impairmentof said asset, the Group books the cumulative unrealized loss previously recognized in shareholders’ equity to the income statement under “Cost of risk” (for debt instruments) and

the subordinationof some tranches determines the distribution of ● losses forthe term of the transaction or risk transfer mechanism. The European regulation defining the new general framework for securitization and creating a clear set of criteria for Simple, Transparent and Standardized (STS) securitizations, as well as the related amendments to the CRR, were published in the Official Journal of the European Union on December 28, 2017, with an effectivedate of January 2019. In line with the Basel Committee’s end-2014 publications, the European Commission aims to revive high-quality securitization markets, without repeating the mistakes made before the 2008 financialcrisis. The introductionof an STS market is a key component of the Capital Markets Union (CMU). The Union intends to strengthen the legislative framework introduced in the wake of the financial crisis, with the aim of better distinguishingbetweendifferenttypes of securitization (simple, transparent and standardized securitizations versus complex, non-transparent and high-risk instruments) and applying amore risk-sensitive prudential framework. under “Net gains or losses on available-for-saleassets” in NBI (for equity instruments). If the asset is sold, the Group recognizes any gains or losses on its income statement under “Net gains or losses on available-for-sale financial assets.” Securitization positions classified as “Financial assets at fair value through profit or loss” are measured at fair value, at both the initial recognition date and the reporting date. Changes in fair value over the period, interest, and gains or losses on disposals related to securitization positions are recognized in “Net gains or losses on financial instruments at fair value throughprofit or loss”. Synthetic securitization transactions in the form of Credit Default Swaps follow accounting rules specific to trading derivatives, as describedin the notes to the consolidatedfinancialstatementsunder “Accounting principles and measurement methods”. In accordancewith IAS 39, securitizedassets are derecognizedwhen Groupe BPCE has transferredsubstantiallyall of the risks and rewards of ownership of the asset. If the Group transfers the cash flows of a financial asset but neither transfers nor retains substantially all the risks and rewards of ownershipof the financial asset, and has not retained control of the financial asset, the Group derecognizesthe financial asset and then recognizes separately, if necessary, as assets or liabilities any rights and obligations created or retained in the transfer. If the Group retains control of the financial asset, it continues to recognize the financial asset to the extent of its continuing involvement in the financial asset.

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Risk Report Pillar III 2017

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