2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYAnnual risk survey5To the extent that the Bank owns assets, or has net long positions, in anyof those markets, a market downturn could result in losses from a declinein the value of its positions. Conversely, to the extent that the Bank hassold assets that it does not own, or has net short positions in any of thosemarkets, a market upturn could expose it to potentially unlimited lossesas it attempts to cover its net short positions by acquiring assets in arising market. The Bank may from time to time have a trading strategyof holding a long position in one asset and a short position in another,from which it expects to gain based on changes in the relative value ofthe two assets. If, however, the relative value of the two assets changesin a direction or manner that the Bank did not anticipate or against whichit is not hedged, the Bank might realize a loss on those paired positions.Such losses, if significant, could adversely affect the Bank’s results ofoperations and financial condition.The Bank may generate lower revenues from brokerage and othercommission and fee-based businesses during market downturns.Financial and economic conditions affect the number and size oftransactions for which the Bank provides securities underwriting, financialadvisory and other investment banking services. The Bank’s corporateand investment banking revenues, which include fees from these services,are directly related to the number and size of the transactions in whichit participates and can decrease as a result of market changes that areunfavorable to its Investment Banking business and clients. In addition,because the fees that the Bank charges for managing its clients’ portfoliosare in many cases based on the value or performance of those portfolios,a market downturn that reduces the value of its clients’ portfolios orincreases the amount of withdrawals would reduce the revenues theBank receives from its asset management, equity derivatives andprivate banking businesses. Independently of market changes, belowmarketperformance by the Bank’s mutual funds may result in increasedwithdrawals and reduced inflows, which would reduce the revenues theBank receives from its asset management business.During recent market downturns (and particularly during the 2008/2009period), the Bank experienced all of these effects and a correspondingdecrease in revenues in the relevant business lines. There can be noassurance that the Bank will not experience similar trends in futuremarket downturns, which may occur periodically and unexpectedly.Protracted market declines can reduce liquidity in the markets, makingit harder to sell assets and possibly leading to material losses.In some of the Bank’s businesses, protracted market movements,particularly asset price declines, can reduce the level of activity in themarket or reduce market liquidity. These developments can lead tomaterial losses if the Bank cannot close out deteriorating positions ina timely way. This is particularly true for assets that are intrinsicallyilliquid. Assets that are not traded on stock exchanges or other publictrading markets, such as certain derivative contracts between financialinstitutions, may have values that the Bank calculates using modelsrather than publicly-quoted prices. Monitoring the deterioration of pricesof assets like these is difficult and could lead to losses that the Bank didnot anticipate.Significant interest rate changes could adversely affect the Bank’srevenues or profitability.The amount of net interest income earned by the Bank during any givenperiod significantly affects its overall revenues and profitability for thatperiod. Interest rates are affected by many factors beyond the Bank’scontrol. Changes in market interest rates could affect the interest ratescharged on interest-earning assets differently than the interest ratespaid on interest-bearing liabilities. Any adverse change in the yield curvecould cause a decline in the Bank’s net interest income from its lendingactivities. In addition, maturity mismatches and increases in the interestrates relating to the Bank’s short-term financing may adversely affectthe Bank’s profitability.The soundness and conduct of other financial institutions and marketparticipants could adversely affect the Bank.The Bank’s ability to engage in funding, investment and derivativetransactions could be adversely affected by the soundness of otherfinancial institutions or market participants. Financial services institutionsare interrelated as a result of trading, clearing, counterparty, funding orother relationships. As a result, defaults, or even rumors or questionsabout, one or more financial services institutions, or the financial servicesindustry generally, have led to market-wide liquidity problems andcould lead to further losses or defaults. The Bank has exposure to manycounterparties in the financial industry, directly and indirectly, includingbrokers and dealers, commercial banks, investment banks, mutual andhedge funds, and other institutional clients with which it regularlyexecutes transactions. Many of these transactions expose the Bank tocredit risk in the event of default of a group of the Bank’s counterpartiesor clients. In addition, the Bank’s credit risk may be exacerbated whenthe collateral held by it cannot be realized upon or is liquidated at pricesnot sufficient to recover the full amount of the loan or derivative exposuredue to the Bank.In addition, misconduct by financial market participants can have amaterial adverse effect on financial institutions due to the interrelatednature of the financial markets. An example is the fraud perpetratedby Bernard Madoff, as a result of which numerous financial institutionsglobally, including the Bank, have announced losses or exposure tolosses in substantial amounts. Potentially significant additional potentialexposure is also possible in the form of litigation, claims in the contextof the bankruptcy proceedings of Bernard Madoff Investment Services(BMIS) (a number of which are pending against the Bank), and otherpotential claims relating to counterparty or client investments made,directly or indirectly, in BMIS or other entities controlled by BernardMadoff, or to the receipt of investment proceeds from BMIS.There can be no assurance that any losses resulting from the riskssummarized above will not materially and adversely affect the Bank’sresults of operations.2242012 Registration document and annual financial report - BNP PARIBAS