BPCE_PILLAR_III_2017

5 CREDIT RISK

Organization of credit risk management

assessesand controls the levelof risk acrossthe Group; ● conducts permanent supervision,including detecting and resolving ● limit breaches and centralized forward-lookingrisk reporting on a consolidatedbasis; conducts controls, or ensures through subsidiaritythat controls are ● conducted,to verify that the operationsand internal proceduresof Group companies comply with legal, professional, or internal standards that apply to banking, financial and insurance activities; performs Level 2 controls of certain processes used to prepare ● financial information and implements a Group Level 2 permanent risk control system; manages risk informationsystems in accordancewith an annual IT ● plan, working closely with the IT departments, while defining the standardsto be appliedfor the measurement,control,reportingand managementof credit risks. The different levels of control at Groupe BPCE operate under the supervision of the DRCCP, which is also responsible for consolidated summary reporting to the various decision-making bodies and committees, in particular the Group Watchlist and Provisions Committee. Rating policy Credit risk measurementrelies on internal rating systems adapted to each categoryof customerand transaction.The Risk, Complianceand PermanentControl division is responsiblefor defining and controlling the performance of these rating systems. Groupe BPCE applies an internal rating methodology,shared by both networks and the main subsidiaries (specific to each customer The system of internal caps used across the Group, which are lower than the regulatory caps, is applied to all Group entities. Likewise, the internal caps system used by the institutions is lower than the Group internal caps, and is applied to all entities of the Banque Populaireand Caisse d’Epargne networks. A Groupwide set of limits has also been established for the major asset classes, major counterpartygroups within each asset class, and exposure levels for countries and industries. These limits apply to all Group institutions. The risk supervision mechanisms were strengthened at the end of 2016 through the addition of a general credit risk policy for the Group, aswell as arisk policy specific to corporates. Caps and limits

The aim of risk supervision is to: improve the identificationof various degrees of situations that are ● stressed or becoming stressed, which may worsen and veer into default. A set of indicators used to identify incidents on customer accounts (past due payments, irregular payments, etc.) or external events (rejected notes, external ratings, customer life events) contributesto this supervisory system; enhance the quality of customer data through a data quality ● supervisionand gradualimprovementsystem,in additionto seeking out high-quality exposures. Risk prevention and monitoring at Groupe BPCE focuses on the quality of information, which is a heightened concern under the requirementsof regulationBCBS 239 and is necessaryfor proper risk assessment,as well as the amount of risk taken and changes in these risks. The supervision teams are responsible for ensuring that the sector-based watch is updated by focusing on sectors of activity identifiedas high-riskand for analyzingportfoliosto help identifythe main concentrations of risk. This system is enhanced by a set of industry-based limits. High-risk loans and counterparties (on the watchlist) and the provisioning policy for the main risks shared by several entities (includingNatixis)are regularlyexaminedby the GroupWatchlistand ProvisionsCommittee.

segment), for individual and professionalretail customers, as well as for corporate customers, “real estate professionals”, “central banks and other sovereign exposures”, “central administrations”, “public-sectorand similardebt” and “financial institutions” segments.

Finally, risk supervision is adapted to each sector and structured in accordancewith a monthlysector-basedwatch that is sharedwith all Group institutions, resulting in procedures that focus on recommendationsfor all Group institutions in at-risk sectors. On behalf of the Group Risk Management and Compliance Committee, the DRCCP measures and verifies that these risk supervision mechanisms (individual and topical limits) are correctly implementedat each institution. The Group SupervisoryBoard is kept informedas Group internallimits are monitored, and of any breaches of the limits defined in accordance withthe risk appetiteframework.

Quality assessment of loan outstandings and impairment policy

SYSTEM GOVERNANCE

changes in the quality of their loan commitments.In particular, this review should determine, for material transactions, whether any reclassificationsneed to be conductedamong the internal risk credit risk assessment categories and, if necessary, the appropriate allocations to non-performing loans and charges to provisions.”

From a regulatory standpoint,Article 118 of the Ministerial Order of November 3, 2014 on internal control specifies that “at least once each quarter, supervised companies shall perform an analysis of

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Risk Report Pillar III 2017