BPCE_PILLAR_III_2017

2 SUMMARY OF RISKS

Main risks and emerging risks

Main risks and emerging risks 2.3

Main risks Credit and counterpartyrisk: Groupe BPCE’s credit and counterparty risk monitoringsystem is regularly reviewed to continuouslyadapt to changes inportfolioquality. The key components of this system include risk appetite, individual, sector and country limits, regulatoryand internalceilings,at both the Group and institution level. Strict risk diversification is applied to maintain alow risk profile. Three new indicatorson concentrationsby risk calss were introduced to the Group’s risk appetite framework in 2017: a maximum percentageof “at-risk”outstandingsin the professionaland corporate customer segments, and a maximum percentage of outstandingsfor exposures in the statement of large exposures. In 2018, a maximum percentage of exposures to the French public sector will be introduced for institutions with material outstandings in this asset class. The aim is first to limit risks on at-risk outstandingsin the asset classes in question and second to limit each institution’s largest outstandings. Sector risks are monitoredat Group level for all business sectors, and especially sectors with the highest at-risk ratings and default rates. Recommendations are issued by a monthly Sector Oversight Committee, made up of representatives from the Local Risk Management divisions and the Groupe BPCE Risk, Compliance and PermanentControl division. These recommendationsare validated by the Group Creditand Counterparty Committee. Groupe BPCE also has a systemof geographiclimits based on country risks. Most of Groupe BPCE’s country risk is concentrated in its domestic market, France, and to a lesser extent in the European Union. Natixis also manages its distribution of country risk through country limits given the particular features of its international business. The Group is vigilant regarding risks associated with European periphery countries and geopolitical risks borne by certain countries.The Group is predominantlyexposed to country risks in the Emerging risks Like other European and French players, Groupe BPCE must address the risks caused by its environmentand is placing greater emphasis on the anticipation and management of emergingrisks. The international situation continues to be a source of concern, despite strengthening global economic growth and more positive conditions in emerging countries. Certain regions remain affected by political instability and budget imbalances, notably due to persistently low commodity prices. In Europe, Brexit coupled with security and migrationissues generaterisks for the stabilityof the EuropeanUnion

banking and corporate asset classes. Virtually all exposures to these asset classesare subjectto individualGroup limits (by counterpartyor groups of counterparties). For counterparty risk, BPCE has begun keeping track of business conducted with CCPs, due to the obligation to centrally clear over-the-counter (OTC) derivatives, potentially resulting in concentrated exposure to CCPs. In monitoring internal caps and Group, sector or country limits over the course of the year, no counterparties were found to have exceeded the regulatory caps and no unusual risk concentrationwas identified. Market risks: market risk indicators are monitored and analyzed at various position aggregation levels, giving an overview of total exposure and risk consumption by risk factor. VaR and stress indicators were kept very low for the Group in 2017 (VaR of € 5.3 million at end-2017and stress test at - € 67 million for the most adverse scenario). Operational risk: considering the nature of its businesses, the main causes of Groupe BPCE’s operatinglosses fall into the followingBasel categories: “fraud”, “execution,delivery and proceduremanagement” and “customers, products and sales practices”. Liquidity, interest rate and currency risks: Groupe BPCE’s liquidity position improved over the course of 2017 thanks to improved coverageof stress scenarios.At December 31, 2017, liquidity reserves covered 174% of all short-term funding as well as short-term maturities of MLT debt (versus 158% at end-2016). 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 integrated to the management system.

and its currency, forming a potential source of risks for banking institutions. The current environment of ultra-low interest rates generates a risk for commercial banking activities, particularly in France where fixed-rateloans predominate, and for life insurance. As the economyin generaland bank transactionsin particularbecome increasinglydigital,risks are on the rise for informationsystemsecurity and customers, with cybersecurity calling for increasing levels of watchfulness.

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Risk Report Pillar III 2017