BPCE - Risk Report - Pillar III 2020

LIQUIDITY, INTEREST RATE AND FOREIGN EXCHANGE RISKS

MANAGEMENT OF STRUCTURAL INTEREST RATE RISK

Management of structural interest rate risk 9.4

Objectives and policies

Structural interest rate risk (or overall interest rate risk) is defined as the risk incurred in the event of a change in interest rates due to all balance sheet and off-balance sheet transactions, except for – if applicable – transactions subject to market risks. Structural interest rate risk is an intrinsic component of the business and profitability of credit institutions.

The objective of the Group’s interest rate risk management system is to monitor each institution’s maturity transformation level in order to contribute to the growth of the Group and the business lines while evening out the impact of any unfavorable interest rate changes on the value of the Group’s banking books and future income.

Interest rate risk oversight and management system

Structural interest rate risk is controlled by a system of indicators and limits set by the Group Asset and Liability Management Committee. It measures structural interest rate risk on the balance sheet, excluding any kind of independent risk (trading, own accounts, etc.). The indicators used are divided into two approaches: a static approach that only takes into account on-balance sheet and off-balance sheet positions at a set date and a dynamic approach which includes commercial and financial forecasts. They can be classified into two sets: gap indicators, which compare the amount of liability • exposures against asset exposures on the same interest rate index and over different maturities. These indicators are used to validate the main balance sheet aggregates to ensure the sustainability of the financial results achieved. Gaps are calculated on the basis of contractual maturities, the results of common behavioral models for different credit or collection products, outflow agreements for products with no maturity date, and specific agreements for regulated rates; sensitivity indicators, both in terms of value and revenues. • Value-based indicators measure the change in the net present value of equity in the light of interest rate shocks applied to the static balance sheet. In addition to the Basel II regulatory indicator (SOT: standard outlier test), which measures sensitivity to interest rate shocks of +/-200 basis points, the

Group has introduced an internal Economic Value of Equity (EVE) indicator. Revenue-based indicators measure the sensitivity of the projected net interest income where there are differences between the change in the market interest rate and the central scenario established quarterly by the Group’s economists. This net interest income sensitivity indicator covers all commercial banking activities and aims to estimate the sensitivity of the institutions’ results to interest rate fluctuations. The dynamic approach in terms of sensitivity of future income has been strengthened by a multi-scenario vision allowing a broader approach by taking into account uncertainties related to business forecasts (new activity and changes in customer behavior), possible changes in the commercial margin, etc. Internal stress tests are carried out periodically to measure changes in the bank’s income trajectory in adverse scenarios. The interest rate position of the Group’s institutions is managed in compliance with the Group’s standards, which formalize both the indicators monitored and the associated limits, as well as the instruments authorized for hedging interest rate risk. These are strictly “vanilla” (unstructured), option sales are excluded and accounting methods with no impact on the Group’s consolidated income are preferred.

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Quantitative disclosures

The interest rate position is mainly driven by Retail Banking and Insurance, and primarily by the networks. Measured using a static approach to interest rate gaps, it shows a structural risk exposure to an increase in interest rates with a surplus of fixed-rate assets compared to fixed-rate resources. This structural surplus is due in particular to the percentage of customer deposits at regulated or similar rates (in particular the Livret A rate). The interest rate gaps at the end of 2020, presented below,

year. This change is linked to the distortion of the customer balance sheet with a sharp increase in sight deposits (resources considered fixed-rate with a conventional medium-term outflow) and a significant increase in short-term fixed-rate loans linked to the dividend payments of state-guaranteed loans (SGLs) by the Group’s institutions. These loans comprise two phases: the first with a known interest rate for one year, and the second with characteristics unknown at present, with customers benefiting from several options to extend or repay their loan at the end of

the first phase. The exercise of this option is not modeled in the show a significant change compared to the previous year with interest rate gap projection, which leads to a significant decline an increase in the application surplus over a one-year period and in fixed-rate assets in 2021. a decrease in the same surplus over the periods beyond one

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RISK REPORT PILLAR III 2020 | GROUPE BPCE