BPCE_REGISTRATION_DOCUMENT_2017

5 FINANCIAL REPORT

IFRS Consolidated Financial Statements of Groupe BPCE as at December 31, 2017

MODEL UNCERTAINTY ADJUSTMENT This adjustment takes into account imperfections in the valuation techniques used, and in particular risk factors not considered even though observablemarket inputs are available. This is the case when the risks inherentin the instrumentsdiffer from those incurredby the observablemarketdata used to determine their valuation. INPUT UNCERTAINTY ADJUSTMENT Observing certain prices or inputs used in valuation techniques may be difficult or the price or input may be too regularly unavailableto determinethe selling price. Under these circumstances,an adjustment may be necessary to reflect the probability that market participants might adopt differentvalues for the same inputs when evaluatingthe financial instrument’s fair value. CREDIT VALUATION ADJUSTMENT (CVA) This adjustment applies to valuations that do not account for the counterparty’scredit quality. It correspondsto the risk of loss linked to the risk of default by a counterpartyand aims to take into account the fact that the Group may not recover the full market value of the transactions. The method for determiningthe CVA is primarily based on the use of market inputs in connection with professional market practices, for all segments of counterparties subject to this calculation. In the absence of liquid market inputs, proxies by type of counterparty, rating and geographic area are used. DEBIT VALUATION ADJUSTMENT (DVA) AND FUNDING VALUATION ADJUSTMENT (FVA) The DVA is symmetrical to the CVA and represents the risk of loss, from the counterparty’s perspective, on liability valuations of financial instruments. It reflects the impact of the Group’s credit quality on the valuationof these instruments.The DVA adjustmentis assessed by observing the Group’s “credit” market input. At Natixis, the main contributor for the Group, this involves the observation of the credit spreads of a sample of comparable banking institutions, taking into account the liquidity of the spread on Natixis’ CDS during the period. The DVA adjustment is established after taking into accountthe funding valuation adjustment (FVA). The followingcriteria are used to determinewhether or not a market is active: the level of activity and trend of the market (includingthe level of ● activity onthe primary market); the length of historical data on prices observed in similar market ● transactions; scarcityof prices recoveredby a service provider; ● sharp bid-ask price spread; ● steep price volatility over time or between different market ● participants. NATIXIS’ CONTROL SYSTEM (NATIXIS IS THE MAIN CONTRIBUTOR TO THE GROUP’S BALANCE SHEET ITEMS MEASURED AT FAIR VALUE) The calculationof fair value is subject to control proceduresaimed at verifying that fair values are determined or validated by an independent function. Fair values determined by reference to external quoted prices or market inputs are validatedby an independentunit (the Market Data Controldepartment).Second-levelcontrolsare carried out by the Risk department.

On less liquid markets,other market information,primarilyobservable data, isused to validate the fair value of instruments. The factorstaken into account includethe following: the origin of the external source (stock market pages, content ● contributionservices, etc.); the consistency of thevarioussources; ● the frequency of data feeds; ● the representative nature of inputs based on recent market ● transactions. For fair values determinedusing valuationmodels, the control system consists of the independentvalidation of model constructionand of the inputs included in these models. This is carried out under the responsibility of the Risk department. It involves verifyingthat the model is consistentwith and relevant to its intendedfunction(price setting,valuation,coverage,measurement and control of risk) and the producto which it applies, based on: a theoreticalapproach:the financialand mathematicalfoundations ● of the model; the application of the model: the pricing models used to generate ● risk and earnings data; the stabilityof the model under parametric stress; ● an assessment of the stability and consistency of the numerical ● methods used; the independent re-implementation of the model as part of ● algorithmvalidation; the comparative analysis of the calibration of model inputs; ● an assessment of the modeling risk, particularly the comparative ● analysis of the model with other valuation models, in order to ensure the adequacy of the model and the payoff (the formula of positive or negative flows attached to the product at maturity); the implementationof an adjustmentin respect of modelingrisk to ● accountfor potentialdeficienciesin the model or its calibration; the incorporationof the model into information systems. ● The methodsfor determiningfair value are monitoredby a number of bodies including the Inputs and Observability Committee, the Valuation Committee, the Impairment Committee and the Model Validation Committee, which comprise representatives of the Risk department, the Finance department and the Market Data Control and Valuation department. Fair value hierarchy For financial reporting purposes, IFRS 13 requires fair value measurementsapplied to financial and non-financialinstruments to be allocated to one of three fair valuelevels: LEVEL 1: VALUATION USING PRICES QUOTED ON A LIQUID MARKET Level 1 comprises instrumentswhose fair value is determined based on directly usable prices quoted on activemarkets. This mainly includes securities listed on a stock exchange or traded continuouslyon other active markets,derivativestraded on organized markets (futures, options, etc.) whose liquidity can be demonstrated, and shares of UCITS for which NAV is determinedand reported on a daily basis.

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Registration document 2017