1998-Paribas Annual Report - BNP Paribas

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3.4 OPERATING RISKS
Operating risks encompass, according to the widest possible
definition, direct and indirect financial risks resulting
from a wide range of failures:
• risks relating to dysfunctions in bank transaction processing
procedures;
• risks relating to poor control of the banking environment
(contractual, legal, taxation, regulatory environment,
etc.);
• risks relating to insufficient ressources for operating
purposes (human resources, information systems, etc.);
• risks relating to the physical protection of bank assets
and capable of limiting the bank’s ability to continue its
activities under normal operating conditions.
As opposed to capital market and credit risks which are
more easily dealt with through the organizational structure
of the bank and by attributing specific responsibilities,
the appraisal and control of operating risks requires
significant coordination between the different Bank
entities, both operational and functional, involved in the
management of these risks.
To this end, Risk Management strengthened the
Operating Risk department in 1998. The principal role
of this department is improving the understanding,
measurement and prevention of operating risks
through:
• defining a common appraisal methodology for the
exposure of the various Paribas entities to operating
risks;
• contributing to transverse actions undertaken at
Group level (with respect to procedures and the analysis
of risks associated with new Paribas products and
activities);
• coordinating measures implemented by the different
Paribas entities to improve operating risk management.
3.5 OTHER SPECIFIC RISK
Hedge Funds
Total stakes in the share capital of Hedge Funds is EUR
86 million at the year end and results from the recapitalization
of LTCM in September 1998. Current exposure
to counterparty risk in respect of Hedge Funds, other
than the risk relating to the capital investment, is covered
in full by guarantees (cash collateral, treasury bills,
etc.).
The potential credit risk calculated in accordance with
internal model methods and market parameters was
EUR 218 million as of February 3, 1999. This risk is
covered by the above-mentioned guarantees.
Millennium bug
The Millennium project was launched in 1996. The
Millennium coordination team set up in 1997 covers the
whole of Paribas. Following the merger of Compagnie
Bancaire and Paribas in 1998, this project was split in
two:
• Three sub-projects are being run in parallel in the
Corporate and Investment Banking and Proprietary
Investment sectors and for Global Securities Services.
The primary aim of these projects is to ensure the millennium
compliance of essential computer programs and
platforms, telecommunication systems and real-estate
infrastructures. These projects are being carried out in
accordance with a detailed and centralized schedule and
should to a large extent be completed during the first
quarter of 1999. The projects also cover non-essential
equipment. Integration tests, tests organized in the different
financial markets where Paribas trades, global
payment tests and customer tests will be performed
during the first half of 1999. The Millennium back-up
plan will then be implemented in all locations in order
to reduce the impact of any internal or external failures
and ensure the continuation of activities. The third subproject
is aimed at measuring the extent to which customer
companies, financial counterparties and
companies in which Paribas has invested are ready for
the new millennium. An initial analysis will be performed
on March 31, 1999 and repeated throughout the
rest of 1999.
• In the other sectors each company has its own specific
Millennium project and an appointed millennium
manager. Non-computer equipment is managed centrally.
Each project covers French and foreign subsidiaries
and partnerships. Millennium compliance will be
achieved by the second or third quarter of 1999 depending
on the company.
The Millennium project is expected to cost EUR 110
million and will mobilize the equivalent of 400 individuals
in 1999. About 50% of this budget will be used in
1999.