BPCE_REGISTRATION_DOCUMENT_2017

3 RISK REPORT Credit risk

loss given default (LGD); ● exposureat default (EAD) – this dependson contractualcash flows, ● the contract’s effective interest rate and the expected prepayment rate. The Group draws on existing concepts and mechanisms to define these inputs, and in particular on internal models developed to calculate regulatory capital requirements and on projection models used for stress tests. Specific adjustments are made to factor in current conditions and forward-looking macroeconomicprojections: IFRS 9 parametersthereforeaim to provide an accurateestimateof ● losses for accounting provision purposes, whereas prudential parameters are more cautious for regulatory framework purposes. Several of these safety buffers are restated; IFRS 9 parametersmust allow lifetime expected credit losses to be ● estimated, whereas prudential parameters are defined to estimate 12-month expected credit losses. 12-month parameters are thus projected overlong periods; IFRS 9 parametersmust be forward-lookingand reflect forecastsof ● future economic conditions over the estimated period, whereas prudential parameters consist of cycle-average (for PD) or cycle-trough estimates (for LGD and EAD). Prudential parameters are therefore also adjusted to reflect forecasts of future economic conditions. The parametersthus defined allow expectedcredit losses for all rated exposures to be measured, regardless of whether they refer to an entity approvedto use the IRB methodor the standardizedmethodto determine its RWA. Conservative default rules are applied to non-rated exposures. Parameters are adjusted to economic conditions by defining reasonable and supportable economic scenarios, coupled with the probability of occurrence and the calculation of a probable average credit loss. This adjustment calls for the definition of models which link IFRS 9 parameters to a set of economic variables. These models are based on those developed for stress tests. Projections are also based on the budget process. Three economic scenarios (the budget scenario,alongwith optimisticand pessimisticviews of this scenario), coupled with probabilities, are defined over a three-year period to estimate the probable economic loss. The scenarios and weightings are defined using analyses produced by Natixis’ Economic Research department and Management’s expert judgment. Although the majority of the parameters are drawn up by the BPCE and Natixis Risk divisions, other entities including Natixis Financement,BPCE Internationaland certain regional institutionsfor their subsidiaries also contribute to the Group IFRS 9 provisioning system. Moreover, regional institutions are responsible for assessing the consistencyof provisionsdeterminedfor the Group with the local and sector characteristics of their loan books and for defining additional sector provisions if necessary. The mechanism for validating IFRS 9 provisions is fully aligned with the Group’s existing model validation process. Parameters are reviewed by the independent internal model validation unit. This unit’s work is reviewedby the GroupModelingCommittee.Finally,the recommendationsissued by the validation unit are followed up. This process is scheduled to ensure that the main parameters will be reviewed before the first-time application of IFRS 9.

In short, the new IFRS 9 provisioningmodel points to an increase in the amount of impairment on loans and securities measured at amortized cost or at fair value through non-recyclableOCI, and on off-balance sheet commitmentsas well as on lease receivables and trade receivables. The calibrationand validation process isongoing and cannotcurrently be disclosed inthe financial statements.

FORBEARANCE, PERFORMING AND NON-PERFORMING EXPOSURES

Institutionswere asked to identify the concepts of “forbearance”and “non-performingexposure” (NPE) for the purposes of the European BankingAuthority(EBA) technicalstandardspublishedon October 21, 2013. These standardsoutline the additionalfinancialdisclosuresthat must be includedwith FINREP financialreportingas of December 31, 2014. They aim to clarify the concepts of “forbearance” and “non-performingexposure” as set out in the ImplementingTechnical Standards (ITS) produced by the EBA, and indicate that such disclosures are neither accounting nor regulatory innature. Forbearance results from the combination of a concession and financial hardship. Forbearance may relate to performing or non-performingloans. Two types of concessions can be made when restructuring a loan (performingforborne exposures): a contractual modification,which is formalized through a rider or ● waiver; refinancing, which is formalized by setting up a new loan ● agreementat the same time as or in the seven days preceding the full or partial repayment of another loan agreement. Meanwhile, financial hardships are observed when: a paymenthas been past due for over 30 days (excludingpayments ● past due for technicalreasons);or an overdraft authorization has been exceeded for more than 60 ● days in the three months preceding the rider or refinancing operation; the loanis assignedan at-risk rating. ● The decision to downgrade a loan from the “performing forborne exposure” to the “non-performing forborne exposure” category is subject to a different set of rules than the rules for default (new concession or payment more than 30 days past due) and, like the decision to move a loan out of the “forborne” category, is subject to probationary periods. Forced restructuring, overindebtedness proceedings, or any kind of default as defined by the Group standard, which involves a forbearancemeasure as previouslydefined, results in classificationas a non-performing forborne exposure. Based on the new deliberation procedure that began in 2016, the differences in standards between NPEs and Basel default call for further analysis. With the discontinuationof the 180-day option for exposures secured by real estate, the concepts of default and NPEs under accounting and regulatory approaches are converging. The Basel Committee’s work on this subject (Prudential treatment of problem assets – definitions of non-performing exposures and forbearance – a consultation that began in April 2016) and similar work by the ECB (Consultation on guidance to banks on non-performingloans, launched in September 2016) are also paving the wayfor the convergenceof these concepts.

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Registration document 2017