2012 Registration document and annual financial report - BNP Paribas

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5RISKSAND CAPITAL ADEQUACYAnnual risk surveyRISK FACTORS5RISKS RELATED TO THE BANK AND ITSINDUSTRYDifficult market and economic conditions could have a material adverseeffect on the operating environment for financial institutions and henceon the Bank’s financial condition, results of operations and cost of risk.As a global financial institution, the Bank’s businesses are highly sensitiveto changes in fi nancial markets and economic conditions generallyin Europe, the United States and elsewhere around the world. TheBank has been and may continue to be confronted with a significantdeterioration of market and economic conditions resulting, amongother things, from crises affecting sovereign obligations, capital, creditor liquidity markets, regional or global recessions, sharp fluctuations incommodity prices, currency exchange rates or interest rates, inflation ordeflation, restructurings or defaults, corporate or sovereign debt ratingdowngrades or adverse geopolitical events (such as natural disasters,acts of terrorism and military conflicts). Market disruptions and sharpeconomic downturns, which may develop quickly and hence not be fullyhedged, could affect the operating environment for financial institutionsfor short or extended periods and have a material adverse effect on theBank’s financial condition, results of operations or cost of risk.European markets have experienced significant disruptions in recentyears as a result of concerns regarding the ability of certain countries inthe Euro-zone to refinance their debt obligations and the extent to whichEuropean Union member states or supranational organizations will bewilling or able to provide financial support to the affected sovereigns.These disruptions contributed to tightened credit markets, increasedvolatility in the exchange rate of the euro against other major currencies,affected the levels of stock market indices and created uncertaintyregarding the economic prospects of certain countries in the EuropeanUnion as well as the quality of bank loans to sovereign debtors in theEuropean Union.The Bank holds and in the future may hold substantial portfolios ofsovereign obligations issued by the governments of, and has and may inthe future have substantial amounts of loans outstanding to borrowersin, certain of the countries that have been most significantly affected bythe crisis in recent years. The Bank also participates in the interbankfinancial market and as a result, is indirectly exposed to risks relatingto the sovereign debt held by the financial institutions with which itdoes business. More generally, the sovereign debt crisis has had, andmay continue to have, an indirect impact on financial markets and,increasingly, economies, in Europe and worldwide, and therefore on theenvironment in which the Bank operates.If economic conditions in Europe or in other parts of the world were todeteriorate, particularly in the context of an exacerbation of the sovereigndebt crisis (such as a sovereign default), the Bank could be requiredto record impairment charges on its sovereign debt holdings or recordlosses on sales thereof, and the resulting market and political disruptionscould have a significant adverse impact on the credit quality of the Bank’scustomers and financial institution counterparties, on market parameterssuch as interest rates, currency exchange rates and stock market indices,and on the Bank’s liquidity and ability to raise financing on acceptableterms.Legislative action and regulatory measures taken in response to theglobal financial crisis may materially impact the Bank and the financialand economic environment in which it operates.Legislation and regulations have been enacted or proposed in recentperiods with a view to introducing a number of changes, some permanent,in the global financial environment. While the objective of these newmeasures is to avoid a recurrence of the recent financial crisis, the impactof the new measures could be to change substantially the environmentin which the Bank and other financial institutions operate.The new measures that have been or may be proposed and adoptedinclude more stringent capital and liquidity requirements, taxes onfinancial transactions, restrictions and temporary or permanent taxeson employee compensation over specified levels, limits on the types ofactivities that commercial banks can undertake (particularly proprietarytrading and, potentially, investment banking activities more generally),restrictions or prohibitions on certain types of financial products oractivities, increased internal control and transparency requirementswith respect to certain activities, more stringent conduct of businessrules, increased regulation of certain types of financial products includingmandatory reporting of derivative transactions, requirements either tomandatorily clear, or otherwise mitigate risks in relation to, over-thecounterderivative transactions, and the creation of new and strengthenedregulatory bodies.Certain measures that have been or are in the process of being adoptedand will be applicable to the Bank, such as the Basel 3 and CapitalRequirements Directive 4 prudential frameworks, the requirements inrelation to them announced by the European Banking Authority and thedesignation of the Bank as a systemically important financial institutionby the Financial Stability Board, will increase the Bank’s regulatory capitaland liquidity requirements and may limit its ability to extend credit orto hold certain assets, particularly those with longer maturities. TheBank implemented an adaptation plan in response to these requirements,including reducing its balance sheet and bolstering its capital base.Ensuring and maintaining compliance with further requirements ofthis type that may be adopted in the future may lead the Bank to takeadditional measures that could weigh on its profitability and adverselyaffect its financial condition and results of operations.2222012 Registration document and annual financial report - BNP PARIBAS
RISKS AND CAPITAL ADEQUACYAnnual risk survey5New measures such as the proposed French banking law or, at the E.U.level, the Liikanen proposal (if adopted) could require the Bank to ringfencecertain of its activities within a subsidiary that will be requiredto comply with prudential ratios and raise financing on a stand-alonebasis. The Federal Reserve’s proposed framework for the regulation offoreign banks may also require the Bank to create a new intermediateholding company for its U.S. activities, which would be required to complywith specific capital and liquidity requirements on a stand-alone basis.In addition, the proposed French banking law, as well as the proposedE.U. framework for a single supervisory mechanism and the proposedE.U. framework for the recovery and resolution of financial institutions,will grant increased powers to regulators (including the French bankingregulator, the Financial Stability Board, the French deposit guaranteefund and, potentially, the European Central Bank) to prevent and/orresolve banks’ financial difficulties, such as the power to require banksto adopt structural changes, issue new securities, cancel existing equity orsubordinated debt securities, convert subordinated debt into equity, and,more generally, ensure that any losses are borne by banks’ shareholdersand creditors. These measures, if adopted, may restrict the Bank’s abilityto allocate and apply capital and funding resources, limit its ability todiversify risk and increase its funding costs, which could, in turn, havean adverse effect on its business, financial condition, and results ofoperations.Some of the new regulatory measures are proposals that are underdiscussion and that are subject to revision, and would in any case needadapting to each country’s regulatory framework by national legislatorsand/or regulators. It is therefore impossible to accurately predict whichmeasures will be adopted or to determine the exact content of suchmeasures and their ultimate impact on the Bank. Depending on thenature and scope of regulatory measures that are ultimately adopted,they could (in addition to having the effects noted above) affect the Bank’sability to conduct (or impose limitations on) certain types of activities, itsability to attract and retain talent (particularly in its investment bankingand financing businesses) and, more generally, its competitiveness andprofitability, which would in turn have an adverse effect on its business,financial condition, and results of operations.The Bank’s access to and cost of funding could be adversely affectedby a resurgence of the Euro-zone sovereign debt crisis, worseningeconomic conditions, further rating downgrades or other factors.The Euro-zone sovereign debt crisis as well as the general macroeconomicenvironment have at times adversely affected the availability and cost offunding for European banks. This was due to several factors, including asharp increase in the perception of bank credit risk due to their exposureto sovereign debt in particular, credit rating downgrades of sovereigns andof banks, and debt market speculation. Many European banks, includingthe Bank, at various points experienced restricted access to wholesaledebt markets and to the interbank market, as well as a general increasein their cost of funding. Accordingly, reliance on direct borrowing from theEuropean Central Bank increased substantially. Were such adverse creditmarket conditions to reappear due to factors relating to the economy orthe financial industry in general or to the Bank in particular, the effecton the liquidity of the European financial sector in general and the Bankin particular could be materially adverse.The Bank’s cost of funding may also be influenced by the credit rating onits long-term debt, which was downgraded by two of the principal ratingagencies in 2012. Further downgrades in the Bank’s credit ratings by anyof the three rating agencies may increase the Bank’s borrowing costs.A substantial increase in new provisions or a shortfall in the level ofpreviously recorded provisions could adversely affect the Bank’s resultsof operations and financial condition.In connection with its lending activities, the Bank regularly establishesprovisions for loan losses, which are recorded in its profit and loss accountunder “cost of risk”. The Bank’s overall level of provisions is based on itsassessment of prior loss experience, the volume and type of lending beingconducted, industry standards, past due loans, economic conditions andother factors related to the recoverability of various loans. Although theBank uses its best efforts to establish an appropriate level of provisions,its lending businesses may have to increase their provisions for loanlosses substantially in the future as a result of deteriorating economicconditions or other causes. Any significant increase in provisions for loanlosses or a significant change in the Bank’s estimate of the risk of lossinherent in its portfolio of non-impaired loans, as well as the occurrenceof loan losses in excess of the related provisions, could have a materialadverse effect on the Bank’s results of operations and financial condition.The Bank may incur significant losses on its trading and investmentactivities due to market fluctuations and volatility.The Bank maintains trading and investment positions in the debt,currency, commodity and equity markets, and in unlisted securities,real estate and other asset classes. These positions could be adverselyaffected by volatility in financial and other markets, i.e., the degree towhich prices fluctuate over a particular period in a particular market,regardless of market levels. There can be no assurance that the extremevolatility and market disruptions experienced during the height of therecent financial crisis will not return in the future and that the Bankwill not incur substantial losses on its capital market activities as aresult. Moreover, volatility trends that prove substantially different fromthe Bank’s expectations may lead to losses relating to a broad range ofother products that the Bank uses, including swaps, forward and futurecontracts, options and structured products.52012 Registration document and annual financial report - BNP PARIBAS 223
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2012REGISTRATION DOCUMENTAND ANNUAL
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2012 Registration documentand annua
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1GROUP PRESENTATION1.1 Group presen
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GROUP PRESENTATIONPresentation of a
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1GROUPPRESENTATIONBNP Paribas and i
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1GROUPPRESENTATION1282012 Registrat
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2CORPORATEGOVERNANCEBoard of Direct
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2CORPORATEGOVERNANCEExecutive Commi
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32012REVIEW OF OPERATIONSBNP Pariba
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32012REVIEW OF OPERATIONSProfit and
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32012REVIEW OF OPERATIONSOutlook3.6
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32012REVIEW OF OPERATIONSLiquidity
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4CONSOLIDATEDFINANCIAL STATEMENTS -
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5RISKSAND CAPITAL ADEQUACYSovereign
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5RISKSAND CAPITAL ADEQUACYSovereign
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5RISKSAND CAPITAL ADEQUACYLiquidity
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5RISKSAND CAPITAL ADEQUACYInsurance
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5RISKSAND CAPITAL ADEQUACYAppendice
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5RISKSAND CAPITAL ADEQUACYAppendix
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6INFORMATIONON THE PARENT COMPANY F
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7ARESPONSIBLE BANK: INFORMATION ON
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8GENERALINFORMATIONDocuments on dis
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8GENERALINFORMATIONFounding documen
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8GENERALINFORMATIONStatutory Audito
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8GENERALINFORMATIONStatutory Audito
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9STATUTORYAUDITORSStatutory Auditor
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10PERSON RESPONSIBLE FOR THE REGIST
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11TABLE OF CONCORDANCEHeadings as l
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HEAD OFFICE16, boulevard des Italie
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