BPCE - Risk Report - Pillar III 2020

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CAPITAL MANAGEMENT AND CAPITAL ADEQUACY

REGULATORY FRAMEWORK

Regulatory framework 4.1

Credit institutions’ capital is regularly monitored in accordance with regulations defined by the Basel Committee. These regulations were reinforced following the introduction of Basel III, with an increase in the level of regulatory capital requirements and the introduction of new risk categories. Basel III recommendations were incorporated in EU directive 2013/36/EU (Capital Requirements Directive – CRD IV) and regulation No. 575/2013 (Capital Requirements Regulation – CRR) of the European Parliament and of the Council. As of January 1, 2014, all EU credit institutions are subject to compliance with the prudential requirements set out in these texts. Credit institutions subject to CRD and CRR are thus required to continuously observe: the Common Equity Tier 1 (CET1) ratio; • the Tier 1 ratio, i.e. CET1 plus Additional Tier 1 (AT1) capital; • the total capital ratio, i.e. Tier 1 plus Tier 2 capital; • and, as of January 1, 2016, the capital buffers which can be • used to absorb losses in the event of tensions. These buffers include: a capital conservation buffer, comprised of Common Equity – Tier 1, aimed at absorbing losses in times of serious economic stress, a countercyclical buffer, aimed at protecting the banking – sector from periods of excess aggregate credit growth. This Common Equity Tier 1 surcharge is supposed to be adjusted over time in order to increase capital requirements during periods in which credit growth exceeds its normal trend and to relax them during slowdown phases, a systemic risk buffer for each Member State aimed at – preventing and mitigating the systemic risks that are not covered by regulations (low for Groupe BPCE given its countries of operation), the different systemic risk buffers aimed at reducing the risk – of failure of systemically important financial institutions. These buffers are specific to each bank. Groupe BPCE is on the list of other systemically important institutions (O-SIIs) and global systemically important banks (G-SIBs). As these buffers are not cumulative, the highest buffer applies.

The capital ratios are equal in terms of the relationship between capital and the sum of: credit and dilution risk-weighted assets; • capital requirements for the prudential supervision of market • risk and operational risk, multiplied by 12.5. Through December 31, 2019, these ratios were subject to a phase-in calculation aimed at gradually transitioning from Basel 2.5 to Basel III. In 2020, Groupe BPCE is required to observe a minimum Common Equity Tier 1 ratio of 4.5% under Pillar I, a minimum Tier 1 capital ratio of 6% and a minimum total capital ratio of 8%. Alongside Pillar 1 minimum capital requirements, Groupe BPCE is subject to additional Tier 1 capital requirements (buffers no longer subject to phase-in measures as of December 31, 2018 at the latest): as of January 1, 2019, the Tier 1 capital conservation buffer – is 2.5% of the total amount of risk exposures, Groupe BPCE’s countercyclical buffer equals the – EAD-weighted average of the buffers defined for each of the Group’s countries of operation. Groupe BPCE’s maximum countercyclical buffer as from January 1, 2019 is 2.5%. As most of Groupe BPCE’s exposures are located in countries whose countercyclical buffer has been set at 0%, the Group considers that this rate will be very close to 0%, the G-SIB buffer has been set at 1% for the Group. – Hybrid debt instruments eligible for inclusion in own funds under Basel II are still subject to phase-in measures in 2020. This applies to instruments that are no longer eligible under the new regulation, which under certain conditions may be eligible for the grandfathering clause. In accordance with this clause, they are gradually excluded over an eight-year period, with a 10% decrease each year. Since January 1, 2020, 20% of all such instruments reported on December 31, 2013 have been recognized, then 10% in 2021 and 0% in 2022. The unrecognized share may be included in the lower equity tier if it meets the relevant criteria.

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RISK REPORT PILLAR III 2020 | GROUPE BPCE

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