2012 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