NATIXIS_PILLAR_III_2017_EN

5 CREDIT RISK

Credit risk mitigation techniques

STRESS TESTS 5.3.3

Group, and comprising three scenarios for the 2018-2020 period: a reference scenario (i.e. a central recovery scenario amid rising petrol prices) and two credit scenarios (a crisis on the Italian and French economies and an extended low rate scenario); specific business scenarios to factor in risks that would not a have been covered by the macroeconomic scenarios. Standard scenarios are therefore defined (an average of three per business) based on business types (Banks, Corporates, Insurance, Aerospace, etc.). This stress testing is regularly calculated for the Natixis consolidation scope to evaluate the risk generated in the event of an adverse trend in the economic and financial data. The results are regularly presented to the Global Risk Committee, which also validates the selected scenarios. The stress-testing approach factors in counterparty ratings and default rates (stressed PD scales, migration matrices, specific downgrades by sovereign counterparty, etc.) and includes stresses on the unsecured LGD (Corporates, Banks and Sovereigns, etc.) and the secured LGD (asset or collateral values by business, etc.). The scenarios, as well as the models and methods selected to assess their impact, are documented, and this documentation is reviewed on each update. The collateral is adjusted for its volatility and type. Collections on collateral are estimated quarterly or annually on the basis of conservative valuations and haircuts, and take into account the actual enforcement of such collateral in times of economic slowdown. Depending on their nature, collateral guarantees must meet specific eligibility criteria: Non-financial guarantee: the eligibility of personal guarantees a depends on the quality of the guarantor and must fulfill several conditions: represent a direct claim opposite to the guarantor and refer j to specific exposures; be irrevocable and unconditional; j in the counterparty defaults, the bank can take legal action j against the guarantor within the permitted time frame to settle payment arrears under the legal document governing the transaction; the guarantee is an obligation secured by a legal document j that established the guarantor’s liability; the guarantor covers all types of payment to be made by the j borrower in question. Financial guarantee: eligibility is determined by the relevant a legal framework, the nature of the guarantee (financial collateral, real collateral or netting agreement) and borrower, as well as liquidity. It must be valued at least once a year and meet all of these conditions:

The credit stress test system covers Natixis scopes subject to the A-IRB, F-IRB and standardized approaches. It is based on choosing scenarios that replicate plausible crisis situations and high degrees of severity, in keeping with market practices, while taking past events, market trends and the environment into account so that purely historical or theoretical scenarios are eliminated. The system is a true risk management tool, with scenarios that are regularly introduced and revised. New subsidiary scopes and models have therefore been added to the stress scenarios since the stress test program was first introduced. The Risk division regularly works on improving the methods used and adding to the scopes defined for the stress scenarios, with particular attention paid to the market stress requirements. New scenarios were reviewed in 2017 and presented to the Global Risk Committee as well as to the Senior Management Committee. These internal credit stress test scenarios are defined based on: macroeconomic assumptions prepared in collaboration with a the economic research and country risks teams and with BPCE Credit risk mitigation is a technique to reduce the credit risk incurred by the bank in the event of counterparty default which can be partial or total. Natixis uses a number of credit risk reduction techniques including netting agreements, personal guarantees, asset guarantees or the use of credit-default swaps (CDS) for hedging purposes. The techniques involve two types of protection: – Non-financial or personal collateral: With this type of collateral, one or more guarantors commit to pay the creditor in the event of borrower default. It includes personal guarantees, on-demand guarantees and credit derivatives. – Financial or real collateral, or secured loans: With a pledge of financial collateral, the creditor is granted real security rights to one or more assets belonging to the borrower or guarantor. Forms of collateral include cash deposits, securities, commodities (such as gold), real estate assets, mortgage-backed securities, life insurance policy pledges. The eligibility of protection is subject to the following process: approval by the Legal department of a legal document covering a the acceptance of the collateral and the exercisability of the collateral; approval by the Risk division. a In accordance with regulatory provisions, the bank performs the valuation of guarantees, periodically reviews these valuations and carries out any necessary adjustments.

Credit risk mitigation techniques 5.4

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NATIXIS Risk report Pillar III 2017