BPCE_REGISTRATION_DOCUMENT_2017

RISK REPORT Credit risk

BACKTESTING All information used to measure the Group’s exposure to all counterparties bearing credit risk is saved. Furthermore, all information on counterparties in default (collections, deterioration, write-offs) for the period is archived. Validity tests are conducted once a year on each of these internally-estimated inputs. All three credit risk inputs are subject to backtesting each year in order to verify the performance of the rating system. More specifically, backtesting is aimed at measuring the overall performance of models used, primarily to ensure that the model’s discriminating power has not declined significantly relative to the modeling period. The average of estimated and observed values is calculatedover several years using the informationavailablefor each model. Observed default rates are then compared with estimated default rates for each rating. Ratings are checked for through-the-cycleapplicability.More specifically, for portfolios with low default rates (large corporates,banks, sovereignsand specialized lending), a detailed analysis is carried out using additional indicators such as severity differences, adjustments to agency ratings and changes in ratings before default. A more qualitative analysis is also performed. Information provided in respect of IFRS 7 Credit risk mitigation techniques are widely used within the Group and are divided into real guarantees and personal guarantees. In some cases, the Group’s institutions choose to include opportunitiesfor eliminating disputed loans among their use of risk mitigationtechniques,particularlywhen the techniquesused are less effectiveor absent. Credit derivatives are also used to reduce risks, and apply almost exclusively to the Corporate customers asset class. DEFINITION OF GUARANTEES A real guarantee involves one or more movable or immovable assets that belong to the debtor or a third party. This guaranteeconsists of granting the creditor a real right to said asset (mortgage, pledge of real property, pledge, third party guarantee, etc.). The effect of this collateral is to: reduce the credit risk incurred on an exposure given the rights of ● the institutionsubject to exposure,in the event of default or other specific credit events affecting the counterparty; obtain the transfer of ownership of certain amountsor assets. ● A personal guarantee is collateral that reduces the credit risk on an exposure, due to the commitmentprovided by a third party to pay a set amount if the counterpartydefaults or due to any other specific event. 3.5.3

The scope of loss given default values is consistent with the values observed, i.e. limited exclusively to exposures at default. Estimated values therefore cannot be directly compared with LGD values measured in the outstandingportfolio. The average of estimated and observedvalues is calculatedover several years using the information available for each model. Actual collections are compared with estimated collections. Downturn LGDs are also verified. Backtestingresults may call for the implementationof action plans if the system is deemed not sufficiently prudent or effective. Backtesting results and the associated action plans are discussed by the Group Modeling Committee,then reviewed by the DRCCP Group Standards & Methods Committee (see governance of the internal rating system). On the basis of these exercises, the rating system has been deemed satisfactoryon the whole in terms of effective risk management.The calibrations are conservative with respect to observed risk: default rates observed are lower than the default rates expected over the entire cycle and over the most recent period. Losses observed on assets indefault arelower thanexpected losses. weighting of the guarantee portion of the exposure. Real guarantees such as cash or liquid collateral are deducted from the gross exposure. Under the IRB approach, excluding retail customers, real guarantees are taken into account, subject to eligibility, by decreasing the Loss Given Default applicableto the transactions.Personal guaranteesare taken into account, subject to eligibility, by substituting a third party’s PD with that of aguarantor. Under the A-IRB approach for retail customers, personal guarantees and real guarantees are taken into account, subject to eligibility, by decreasing the Loss Given Default applicable to the transactions in question. CONDITIONS FOR THE INCORPORATION OF GUARANTEES Articles 207 to 210 of Capital Requirements Regulation (CRR) No. 575/2013 set out the conditions for the incorporation of guarantees, inparticular: there is no significant positive correlation between the borrower’s ● credit quality and the instrument’svalue. Debt securities issued by the borrowerare not eligible; the guarantee is duly documented and accompanied by a strict ● procedureauthorizing rapid debt collection; the bank has duly documented procedures in place, which are ● adapted to the various types and amountsof instruments used; the bank sets the market value of the instrument and restates it ● where necessary, in particular when this market value deteriorates significantly.

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Credit risk mitigation techniques

ACCOUNTING METHOD USING THE STANDARDIZED OR IRB APPROACH

Under the standardized approach, personal guarantees and real guaranteesare accountedfor, subjectto eligibility,using an enhanced

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Registration document 2017

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