BPCE_PILLAR_III_2017

9 LIQUIDITY, INTEREST RATE AND FOREIGN EXCHANGE RISKS Management of structural interest rate risk

Management of structural interest rate risk 9.4

Objectives and policies Structuralinterest rate risk (or overall interest rate risk) is defined as the risk incurred in the event of a change in interest rates due to all balance sheet and off-balance sheet transactions, except for – if applicable – transactions subject to market risks. This risk is an intrinsic component of the business and profitability of credit institutions.

The objective of the Group’s interest rate risk management mechanismis to monitor the level of institutions’changes in interest rates in order to contribute to the growth of the Group and the business lines while evening out the impact of any unfavorable interest rate changes on the value of the Group’s banking books and future income.

Interest rate risk oversight and management system Structuralinterestrate risk is controlledby a systemof indicatorsand limits defined by the Group Asset and Liability Management Committee. It measures structural risks on the balance sheet, excluding any kind of independentrisk (trading, own accounts, etc.).

differencesbetweenthe change in the market interest rate and the central scenarioestablishedquarterlyby the Group’s economists.In additionto the Basel II regulatoryindicatoron the sensitivityof the balance sheet’s net present value to interest-rate shocks of +/-200 basis points, the Group has introducedsensitivityindicators on the net interest income of all its commercialbanking activities. These indicators aim to estimate the sensitivity of its institutions’ results to uncertainties surrounding interest rates, business forecasts (new business and customer behavior) and sales margins. Instruments authorized to hedge this risk are strictly vanilla (non-structured), excluding any sale of options and favoring accountingtreatment that does not impact the Group’s consolidated results. Groupe BPCE also improved its oversight of interest rate risk in the banking book to ensure a dynamic multi-scenario approach better suited to managing this risk. Future regulatory changes relating to this risk are also currently being added to the managementsystem.

The indicators used are divided into two approaches: a static approach that only takes into account on-balance sheet and off-balance sheet positions at a set date and a dynamic approach which includes commercial and financial expectations. They can be classified into two sets: gap indicators that compare the amount of liability exposures ● against asset exposures on the same interest rate index and over different maturities.These indicators are used to validate the main balance sheet aggregates to ensure the sustainability of the financialresults achieved.Gaps are calculatedbased on contractual debt schedules and the results of the common behavioral models for various indexesas well as forthe fixed rate; sensitivity indicators measure the change in the net present value ● of a portfolio or projected net interest income where there are

Quantitative disclosures

TABLE 80 – INTEREST RATE GAP ➡

Most of the Group’s interest rate gap is carried by retail banking and Insuranceand primarily by the networks.This gap is relatively stable over time and complies with internal limits.

1/1/2018 to 12/31/2018

1/1/2019 to 12/31/2021

1/1/2022 to 12/31/2025

in billions of euros

Interestrate gap(fixed-rate)*

35.3

19.1

(5.2)

The indicatortakes into accountall assetand liabilitypositionsand floating-ratepositionsuntil the next interestrate resetdate. *

SENSITIVITY INDICATORS The sensitivity of the net present value of the Group’s balance sheet to a +/-200 bp variationin interestrates is much lower than the 20% regulatory limit. Groupe BPCE’s sensitivity to interest rate rises was -1.9% at December31, 2017.

The change in the Group’s projected one-year net interest income calculated under five scenarios (increase in rates, decrease in rates, steepening of the curve, flattening of the curve, gradual recovery) comparedto the central scenarioshowed,at September 30, 2017, the decrease in rates to be the most adverse scenario, with expected losses of € 196 million year-on-year.

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Risk Report Pillar III 2017