BPCE_PILLAR_III_2017

CREDIT RISK Internal ratings and risk measurements

Review ofinternal ratings-based models The DRCCP 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 ALMrisk models. The validation team conducts independent analyses in compliance with a charter and procedures that describe interactions with the modelingentities and the steps of the review. This review is based on a set of qualitativeand quantitativecriteria,and mainly addressesthe

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 involvementmay be expanded prior to and after an investigation of data quality, system implementationand operationalintegration. In conclusion, the review issues 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 issues an opinion on compliancewith prudential regulations. Where necessary, the review is accompanied by recommendations.

following points: documentation; ● methodology, including the validity of assumptions; ● performance; ● robustness; ● compliance withregulations. ●

5

Model mapping The DRCCP keeps an up-to-datemap of Group internal rating models, clearly indicatingtheir scope in terms of Group segmentsand entities, as well as their main features, includinga general score derived from the annual model review characterizing the performance and freshnessof each model (age/yearof development). The table below lists the Group’s internal credit models used for risk management purposes and, when authorized by the supervisor, for the determinationof capital requirements for the Banque Populaire

and Caisse d’Epargne networks, Natixis and its subsidiaries, Crédit Foncier and Banque Palatine. New models have been added to the system since 2016, to better reflect the specificnature of certainscopes of operation.In particular, two rating models were introduced for small enterprises ( € 3 million < Revenue < € 10 million) in October 2017. These models draw on account behavior variables and the company’s financial data. Separate LGD models have also been introduced for commodities trade financingagreements and financingwith listed equities.

83

Risk Report Pillar III 2017