BPCE - Risk Report - Pillar III 2020

CREDIT RISKS

CREDIT RISK MANAGEMENT

HIGHLIGHTS With regulations undergoing significant changes, all institutions are required to implement applicable standards, rules and policies in their operations, in order to ensure consistent implementation throughout the Group. The fiscal year 2020 was mainly marked by the management and effects of the health crisis, but several fundamental developments were furthered and implemented: the home loan risk policy was reviewed in the context of • the recommendations of the High Council for Financial Stability: it was being rolled out at the end of 2020. The policy introduces a new indicator not previously used by the networks and not present in the information systems: DTI (Debt to income). The following standards have been implemented: the standard concerning forbearance, a subset of the new • default, was clarified in order to be implemented in the information systems in early 2021; CAPS AND LIMITS The system of internal caps used across the Group, which are lower than the regulatory caps, is aimed at increasing the division of risks and is applied to all Group entities. The internal caps system used by the institutions is lower than or equal to the Group internal caps, and is applied to the Banque Populaire and Caisse d’Epargne networks and the subsidiaries. A Groupwide set of individual limits has also been established for the major counterparties as well as exposure levels for countries and industries. These limits apply to all Group institutions. The individual limits system in place, aimed at dividing up risks and making them individually acceptable in terms of each institution’s profits and capital position, i.e. without including the value of collateral, to define the maximum amount of acceptable risk for a given counterparty. The aim of this position is to neutralize the operational risk associated with the recognition of collateral and with execution in the event the institution is required to call in the collateral. Risk supervision is adapted to each sector via a monthly sector watch, which is a responsibility shared with all Group institutions. Sector policies and limits have been established for that purpose. On behalf of the Group Risk and Compliance Committee, the Risk division measures and verifies that these risk supervision mechanisms (individual and topical limits) are correctly implemented at each institution. The Group Supervisory Board is kept informed as Group internal caps are monitored, and is notified of any breaches of limits defined in accordance with the risk appetite framework. Credit risk supervision system

the high-risk and new default standards were rolled out in • the institutions and received change support. Groupe BPCE has set up a system called “loan pricing” in order to take into account the ECB’s recommendation asking it to: 1) have a homogeneous group standard covering the four dimensions – TCI, Operating expenses, Cost of risk, Cost of equity, with an ROE vision; 2) have an IT tool for pricing and monitoring loan profitability; 3) Investigate and manage exceptions in loan pricing. This loan pricing system enables the quarterly monitoring of pricing by institution and at Group level.

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METHOD USED TO ASSIGN OPERATIONAL LIMITS ON INTERNAL CAPITAL The quarterly Group risk dashboard is used to monitor consumption of risk-weighted assets in the Group’s main asset classes: it compares any differentials in terms of changes between gross exposures and consumption of RWA. By using these systems, the Group is able to accurately monitor the change in capital needed to cover risks in each asset class, while also observing any changes in the quality of the asset classes in question. CORRELATION RISK POLICY Correlation risk is governed by a special decision-making process, where a counterparty offers its own shares as collateral. A top-up clause is systematically required on such transactions. For wrong-way risk, usually associated with collateral swaps between credit institutions, BPCE’s liquidity reserve procedure defines this criterion as follows: “the counterparty to the repo and the securities received as collateral for that repo shall not be included in the same regulatory group.” However, these transactions may be reviewed on a case-by-case basis, under a special decision-making process, where the collateral consists exclusively of retail loans serving to finance residential real estate.

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RISK REPORT PILLAR III 2020 | GROUPE BPCE