BPCE - Risk Report - Pillar III 2020

CREDIT RISKS

RISK MEASUREMENT AND INTERNAL RATINGS

The European Central Bank is continuing its work by applying a similar methodology via the Internal Model Investigation (IMI) process. Two reviews were carried out during the last quarter of 2019 (one on the retail – individual customers PD model and the retail LGD model, and the other on the corporate PD models for small businesses). These two reviews also gave rise to reports by the supervisor. The additional work generated by these reports largely involves the implementation of regulatory changes made by the European Banking Authority as part of its “IRB Repair” program. IMPACTS ON THE AMOUNT OF GUARANTEES THE INSTITUTION IS REQUIRED TO GIVE IN THE EVENT ITS CREDIT RATING IS DOWNGRADED The CRR2 and the Delegated Act require institutions to report to the competent authorities any contracts the conditions of which lead to additional liquidity outflows following a material deterioration of the credit quality of the institution ( e.g. a downgrade in its external credit assessment by three notches). The institution shall regularly review the extent of this deterioration in light of what is relevant under the contracts it has entered into and shall notify the result of its review to the competent authorities (CRR 423.2/AD 30.2). The competent authorities decide the weighting to be assigned to contracts deemed to have a material impact. For contracts containing early exit clauses on master agreements (framework agreements between the bank and a counterparty for OTC derivative transactions without collateral), the early termination clause allows one counterparty to terminate the contract early following the deterioration of the credit quality of the other counterparty. Accordingly, the number of early terminations generated by credit quality deterioration shall be estimated.

It was agreed that the Group would measure outflows generated by reviewing all the Group’s master agreements or credit support annexes on the OTC market, in order to assess the amount of the deposit/collateral required following a downgrade of three notches in the institution’s long-term credit rating by three rating agencies (Moody’s, S&P, Fitch). The calculation also includes the amount of the deposit/collateral required following a downgrade of one notch in the institution’s short-term credit rating, with the Group considering such a downgrade inevitable if the institution’s LT credit rating is downgraded three notches. At Groupe BPCE level, the calculation covers BPCE SA, Natixis, Crédit Foncier and their funding vehicles: BP CB, GCE CB, BPCE SFH, FCT HL, SCF and VMG. Some intragroup contracts generate outflows at the individual institution level, but are neutralized at the Groupe BPCE consolidated level. The Group uses a conservative approach in its calculation: the impact for each contract is the maximum amount between • the three rating agencies between a 1-notch downgrade in the ST rating and a 3-notch downgrade in the LT rating; the amount of ratings triggers reported is the sum of all • impacts of a one-notch downgrade in the ST rating and a three-notch downgrade in the MLT rating; the assumption is made that all external ratings are • downgraded simultaneously by the three agencies and for all rated entities; as the national competent authority has not issued a • recommendation, a weighting of 100% is applied to reported outflows for the calculation of the LCR.

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RISK REPORT PILLAR III 2020 | GROUPE BPCE