BPCE_REGISTRATION_DOCUMENT_2017

3 RISK REPORT Credit risk

RATING SYSTEM Information provided in respect of IFRS 7

validationby the DRCCP Standardsand MethodsCommittee,based ● on the technicalopinionissued by the GroupModelingCommittee, which decides to implementthe necessarychanges, particularlyin terms of processes and operationaladaptation.These changes are submitted,where applicable,to the Europeansupervisoryauthority for prior approval, in accordance with Commission Delegated regulationNo. 529/2014on changes of the Internal Ratings Based Approach used indetermining capitalrequirements. After the completion of this governance process, internal control reports and statements of decisions are made available to Group management(and supervisorsfor internal models used to determine capitalrequirements).Each year, a summaryof the performancesand adequacy of internal models is presented to the Risk Management Committee of the Group Supervisory Board. DEVELOPING A MODEL The DRCCP relies on a formalized process describing the main steps taken in developingany new model. This document,which serves as a guide for the entire documentationand validationprocess,is based on: a literary and generaldescriptionof the model, indicatingits scope ● of application (type of counterparty, type of product, business line, etc.), the main assumptions on which it is based, and any aspects not covered; a descriptive diagram summarizing how the ultimately chosen ● model works, indicating the various inputs, processes and outputs; a detailed description of themodelingsteps and approach: ● setting up the workingenvironment, - building amodelingsample, - creating samples, out-of-sample tests and out-of-time tests, - where applicable, comparing proposed models, where applicable, - justifying the choice of model (expert opinions, level of - discrimination, stability, consistency, robustness, etc.); a literary description of the model’s main risk factors. ● The internal models developed must meet strict risk discrimination and qualification criteria. REVIEW OF INTERNAL 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.

Internal rating systemmodels are developedbased on historicaldata for observeddefaultsand losses. They are used to measurethe credit risks to which Groupe BPCE is exposed, expressed as a one-year probability of default (PD), as a Loss Given Default (LGD) and as Credit ConversionFactors (CCF), dependingon the characteristicsof the transactions.The models are generally built and validated based on internalhistoricaldata from as far back as possible,in accordance with prudenceand representativenessconstraints (affectedportfolios and economic conditions). These internal rating systems are also applied to risk supervision, authorization systems, internal limits on counterparties, etc., and may also serve as a basis for other processes, such as statistical provisioning. The resulting risk metrics are then used to calculate capital requirements, once they have been validated by the supervisor in compliance withregulatory requirements. INTERNAL RATING SYSTEM GOVERNANCE The internal governance of rating systems is centered on the development, validation, monitoring and modification of these systems. The DRCCP is completely independentfrom the rest of the Group (Banque Populaire and Caisse d’Epargne networks, Natixis, Crédit Foncier and the other subsidiaries)in conductingperformance and adequacy reviews of models for credit risks, counterpartyrisks, and structuralALM and market risks. This role assignedto the DRCCP is based on governancedefined in a model validationcharter,and on a map of models used throughouthe Group. The validation charter for the Group’s models encompassesall types of quantitative models, and defines and specifies the duties and responsibilitiesof those involved throughoutthe models’ life cycles. It also specifies the conditions for delegating validation, within a specific scope, to another entity besides the DRCCP validationteam: the entity in question must have the necessary expertise, be independentof the team developingthe model, and have appropriate validation governance. Under these rules, the validation of certain specific PD and LGD models, IMM models for counterpartyrisk, IMA and standard models for market risk and cautious valuation models has been delegated to the independent validation team at Natixis. The internal validation process for new models or for changes to existing models is broken down into three steps: a review of the model and its adequacy, conductedindependently ● of the entities havingworkedon the model; a review by the Group Modeling Committee, comprised of ● quantitative experts (modeling specialists and validators) and business line expertswho issuea technical opinion onthe model;

158

Registration document 2017