NATIXIS -2020 Universal Registration Document

3 RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management

Where authorizationis granted, the findings and results of the model validation process performed at Natixis are presented to the Risk Model Oversight Committee for confirmation, then submitted to the Model Risk Management Committee for approval before being sent to the Standards and Methods Committee of the Groupe BPCE Risk, Compliance and Permanent Control division for final validation and possible submission to the regulator. This Model Risk Management Committee is tasked with supervising the risk model for all of Natixis’ activities by, on one hand, approving validation reports and the related remediationplans and, on the other hand, monitoringconsolidatedrisk model indicators. The Risk Model OversightCommittee is chaired by the Head of the Model Risk & Risk GovernanceDepartment.The Model Risk ManagementCommittee is chaired by the Chief Executive Officer of Natixis, directly or indirectly through a specific delegation of authority. Rating tool performance monitoring and backtesting Backtesting and benchmarking are an integral part of the model validation process. Backtesting and performance monitoring programs are used at least once a year to ensure the quality and reliability of rating models, LGD estimates and probability of default scales. They include a detailed analysis based on a range of indicators, e.g. differences in terms of severity and migration compared with agency ratings, observed defaults and losses and changes in ratings prior to default, and the performance measurementsof LGD models, based on the quantitativeanalysis of historical data and supplemented by qualitative analysis. Rating method performance monitoring and backtesting of PD The rating methods are periodically checked and undergo external benchmarking to ensure the consistency of ratings produced using expert appraisal methods, as well as their robustness over time according to regulatory requirements. The monitoring methods are defined through a backtesting procedure tailored to each type of model. For Natixis, the corporate (including structured finance), interbank and sovereign portfolios, which are handled using dedicated rating tools, have the lowest default rates (Low Default Portfolios). These portfolios are backtested in accordance with their specific nature, namely the low number of defaults and the difficulty in creating and maintaining a PD scale based on internal data. The backtesting procedure, which draws on these data (and sometimes external data in the case of backtesting of the banking model or the major corporates rating grids particularly), consists of two stages: an analysis of the absolute performance,which is based on the default rate and internal migrations, and an analysis of the relative performance, which is based on a comparisonwith external ratings. Alerts are triggered by performance rules and indicators as necessary. These checks are conducted by backtesting the various rating models once a year by scope and the results are presented to the Credit Risk Model Monitoring Committee (CRMMC) which meets at least quarterly. Subsequently, the results are submitted to the

internal validation team (Model Risk Management) and presented to the various Committees in order to inform the bank’s Management. The CRMMC Committee: serves as a forum for presenting the results of performance and V stability measurements; analyzes the indicators whose alert thresholds have been V exceeded; decides on any measures to be taken to correct any deviations or V anomalies. These measures may take different forms, including changing rating practices, methodologies, performance analyses or alert threshold values. The severities observed between internal ratings and agency ratings are studied. Natixis analyzes all internal ratings of counterparties, which are also rated by rating agencies (Standard and Poor’s, Moody’s and Fitch). The extent to which the risk assessments are aligned can be determined through these analyses. The change in the portfolio’s credit quality over one year is also analyzed by looking at internal rating migrations. Additional indicators are also calculated to verify the internal risk ranking (Gini Index, average rating, previous year’s ratings, ratings of counterparties that have defaulted) and provide statistics as a supplement to the qualitative analyses. Monitoring and backtesting of internal LGD, CCF and ELBE under the advanced method The LGD, ELBE and CCF (see glossary) levels for the different lending scopes are backtested at least once a year (based on internal data), as are the rating models and the associated PD, to verify the reliability of the estimates over time. LGD, CCF and ELBE backtesting is carried out by the risk division’s teams to: The inputs of the models for the scope of SpecializedFinancing and collateral (financial or other) are regularly updated, so that they reflect actual conditions as accurately as possible. Both the market inputs and collection inputs are updated. The losses and estimates produced by the models are compared based on historical data covering as long a period as possible. The indicators defined for backtesting are used both to validate the model and measure its performance. Two main types of indicators are used: population stability indicators: these analyses are used to check V that the population observed is still similar to the population that was used to build the model. The model may be called into question if the segmentation variables or the LGDs result in excessively large distribution differences. All of these indicators are compared against the benchmark indicators (usually those calculated when the model was built or those issued by external data or agencies). These analyses are applicable to both expert appraisal-based models and statistical models; verify that the model is correctly calibrated; V review the model’s discrimination power; V assess the model’s stability over time. V

132

NATIXIS UNIVERSAL REGISTRATION DOCUMENT 2020