2007 REGISTRATION DOCUMENT

2007 REVIEW OF OPERATIONSOutlook 4CAPITAL M ANAGEMENTOn 1 January 2008, the new Basel II capital framework came into forcefor banks in the European Union applying advanced measurementapproaches to risk. The original Basel I framework introduced in 1998had represented a major step towards improving financial strengthin the banking industry. Basel II is a considerable improvement on itspredecessor, aligning capital requirements more closely to the underlyingeconomic risks that banks face. Nowhere is this more relevant than inthe current market climate.Thanks to the quality of its banking books, the Group’s transition to BaselII will result in a reduction of risk-weighted assets, although this will belimited by the applicable capital floor, set at 90% of Basel I risk-weightedassets in 2008. The calculation of eligible capital under Basel II is alsomore restrictive. In light of these opposing changes in the numeratorand denominator, the estimated Tier 1 ratio under Basel II is 7.6% at1 January 2008, representing an improvement of some 30 basis pointscompared to the Tier 1 ratio under Basel I.The Group will monitor the dynamics of this new ratio for a year beforedisclosing its target Tier 1 ratio under Basel II.BNP Paribas has opted for the advanced approaches allowed underBasel II. In accordance with the European Directive and its implementinglegislation in France, on 20 December 2007 the French banking supervisor(Commission Bancaire) approved the use of the Group’s own models todetermine its minimum capital requirements as from 1 January 2008. Thescope of entities authorised to use these internal risk models is significant,and includes BNP Paribas SA and Cetelem in France and abroad. However,for the time being there are a few notable exceptions such as BNL andBancWest. Other entities, such as subsidiaries in emerging countries,will only adopt these internal models after a number of years, oncethey comply with the conditions set by the Commission Bancaire andagreed by the Group.FIRST PILLAR: NEW MINIMUM CAPITALREQUIREMENTSCredit riskBNP Paribas has been using internal ratings-based models to calculatecredit risk for many years. The introduction of Basel II prompted theGroup to improve and perfect its techniques and aim for a more stringentquantification, documentation and reporting of risks.Corporate and Investment BankingCorporate and Investment Banking incurs the bulk of the Group’scredit risk on its corporate, banking and sovereign customers. GroupRisk Management (GRM) ensures that credit risk policies are appliedconsistently by all entities, irrespective of their legal form or country. Thesame credit risk management and measurement rules apply throughoutthe Group; they are centralised and calibrated on a global scale.Credit risk methodologies are based on the following three keyparameters:■ Counterparty Rating, which reflects the probability that the borrowermay default through the cycle;■ Loss Given Default (LGD), which is set as a function of the GlobalRecovery Rate or expected amount recoverable on a credit facilityif the borrower defaults. This is estimated before the facility isgranted;■ Exposure at Default (EAD), which represents the actual exposure forthe lender at the time of default.Borrowers are graded based on a series of documents and tools thatmake up the Group’s ratings methodology, including:■ core policies : Standard Ratings Policy and Specific Ratings Policiesadapted to certain business segments;■ ratings-based tools;■ a ratings process, which is part of the credit assessment procedure;■ control and oversight procedures, which involve validating andmonitoring the ratings methodology.Retail BankingRetail banking operations are carried out either by the parent company’snetwork of branches in France, or by certain subsidiaries including theCetelem, BancWest and BNL sub-groups.The methods for managing and assessing credit risk on internationalretail banking operations included in the Cetelem sub-group are basedon a central model calibrated on local data. BNL and BancWest subgroupswill adopt this model after a number of years, once their creditrisk approaches have been standardised and validated by central GRMteams and approved by supervisors in their host countries.The Standard Ratings Policy for Retail Operations provides a frameworkallowing Group core businesses and risk management departmentsto assess, prioritise and monitor credit risks consistently. This policy isused for transactions presenting a high degree of granularity, small unitvolumes and a standard risk profile. Borrowers are assigned scores inaccordance with the policy, which sets out:■ standard internal ratings-based principles, underlining the importanceof a watertight system and the ability to adapt to changes in thecredit environment;■ principles for defining groups of transactions with similar riskcharacteristics (Risk Groups);■ principles relative to credit models, particularly the need to developdiscriminating and understandable models, and model or observe riskindicators downstream in order to calibrate exposures. Risk indicatorsmust be quantified based on historical data covering a minimumperiod of five years, and in-depth, representative sampling. All modelsmust be documented in detail.Scoring techniques are not focused on grading individual borrowersbut on assigning them to risk groups presenting the same default riskcharacteristics. This also applies to the other credit risk inputs Exposureat Default (EAD) and Loss Given Default (LGD).Securitised exposures< Contents >Assets securitised as part of proprietary securitisation transactions whichrespect the eligibility criteria under Basel II, particularly regarding thesignificant risk transfer are excluded from the calculation of regulatorycapital. T he positions that BNP Paribas may hold in the securitisation andany commitments subsequently granted to the securitisation vehicle areincluded in the calculation using the external ratings-based approach.12345678910112007 Registration document - BNP PARIBAS 103