NATIXIS - 2018 Registration document and annual financial report

3 RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management

Specific wrong-way risk gives rise to specific own funds requirements (Article 291.5 of the European regulation of June 26, 2013, on prudential requirements for credit institutions and investment firms) and to prior approval of specific limits. General wrong-way risk is covered through Wrong Way Risk stress scenarios by asset class. Rating system 3.2.3.5 Internal rating system (Data certified by the Statutory Auditors in accordance with IFRS 7) The internal rating system is an integral part of Natixis’ credit risk assessment, monitoring and control mechanism. It covers all the methods, processes, tools and controls used to evaluate credit risk. It takes into account fundamental inputs, including probability of default (PD), which corresponds to a rating, and loss given default (LGD), which is expressed as a percentage. Pursuant to regulatory requirements, all counterparties in the banking book and the related exposures must have an internal rating if they: carry a loan or are assigned a credit limit; a guarantee a loan; a

internal rating methodologies specific to the various Basel a asset classes and consistent with Natixis’ risk profile; there is a unique rating procedure and methodology for each asset class; an IT system used for managing the successive stages of the a rating process, from the initiation of the process to the approval and logging of the complete process; procedures and controls that place internal ratings at the heart a of the risk management system, from transaction origination to ex-post analysis of defaulting counterparties and the losses incurred on the relevant loans; periodic reviews of rating methodologies, the method for a calculating the LGD and the underlying risk inputs. With respect to country risk, the system is based on sovereign ratings and country ratings that limit the ratings that can be given to non-sovereign counterparties. These ratings are reviewed annually or more often if necessary. Since September 30, 2010, Natixis has used internal rating methods specific to the different asset classes approved by the Autorité de Contrôle Prudentiel et de Résolution (ACPR—French Prudential Supervisory Authority), and that use the advanced internal ratings-based method (A-IRB) to rate “corporates”, “sovereigns”, “banks”, “Specialized Financing” and some categories of Consumer Finance exposures. Ratings are established based on two approaches, namely statistical approaches and expert appraisals.

issue securities used as collateral for a loan. a The internal rating mechanism is based on:

INDICATIVE EQUIVALENTS BETWEEN INTERNAL RATINGS BASED ON EXPERT APPRAISAL AND EXTERNAL AGENCY R RATINGS (CORPORATES, BANKS, SPECIALIZED FINANCING INSTITUTIONS)

Internal rating

S&P/Fitch equivalent

Moody’s equivalent

1-year PD

AAA AA+

AAA AA+

Aaa Aa1 Aa2 Aa3

0.03% 0.03% 0.03% 0.03% 0.03% 0.04% 0.09% 0.17% 0.31% 0.53% 0.84% 1.29% 1.91% 2.74% 3.83% 5.24% 7.04% 9.28% 12.02% 15.37% 19.41%

AA

AA

AA-

AA-

A+

A+

A1 A2 A3

A

A

A-

A-

BBB+ BBB BBB-

BBB+ BBB BBB-

Baa1 Baa2 Baa3

BB+

BB+

Ba1 Ba2 Ba3

BB

BB

BB-

BB-

B+

B+

B1 B2 B3

B

B

B-

B-

CCC+ CCC CCC-

CCC+ CCC CCC-

Caa1 Caa2 Caa3

CC

CC

Ca

C

C

C

The rating scale varies according to the type of counterparty and also one of the criteria used to determine the level of authority includes 21 notches for major corporates, banks and specialized required to approve credit applications. financing institutions. It should be noted that internal ratings are

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Natixis Registration Document 2018