2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYRisk management5Additional information about risk definitionsAlthough a lot of material has been written on the classification ofbanking risks, and industry regulations have produced a numberof widely accepted definitions, there is still no comprehensiveaccount of all of the risks to which banks are exposed. Significantprogress has nevertheless been made in understanding theprecise nature of risks and how they interact. The interactionbetween these risks has not yet been quantified, but is capturedby global stress scenarios. The following comments review theGroup’s latest conceptual developments.■ Market risk and credit/counterparty riskIn Fixed Income trading books, credit instruments are valuedon the basis of bond yields and credit spreads, which representmarket parameters in the same way as interest rates or foreignexchange rates. The credit risk arising on the issuer of the debtinstrument is therefore a component of market risk known asissuer risk.Issuer risk is different from counterparty risk. In the case of creditderivatives, issuer risk corresponds to the credit risk on theunderlying asset, whereas counterparty risk represents the creditrisk on the third party with whom the derivative was contracted.Counterparty risk is a credit risk, while issuer risk is a componentof market risk.■ Operational risk, credit risk and market riskOperational risk arises from inadequate or failed internalprocesses of all kinds, ranging from loan origination and marketrisk-taking to transaction execution and risk oversight.However, human decisions taken in compliance with applicablerules and regulations cannot give rise to operational risk, evenwhen they involve an error of judgment.Residual risk, defined by internal control regulations as the riskthat credit risk mitigation techniques prove less efficient thanexpected, is considered to derive from an operational failure andis therefore a component of operational risk.CONCENTRATION RISKConcentration risk and its corollary, diversification effects, are embeddedwithin each risk, especially for credit, market and operational risks usingthe correlation parameters taken into account by the corresponding riskmodels.It is assessed at consolidated Group level and at financial conglomeratelevel.ASSET-LIABILITY MANAGEMENT RISKAsset-liability management risk is the risk of incurring a loss as a resultof mismatches in interest rates, maturities or nature between assets andliabilities. For banking activities, asset-liability management risk arisesin non-trading portfolios and primarily relates to global interest raterisk. For insurance activities, it also includes the risk of mismatchesarising from changes in the value of shares and other assets (particularlyproperty) held by the general insurance fund.BREAKEVEN RISKBreakeven risk is the risk of incurring an operating loss due to a changein the economic environment leading to a decline in revenue coupledwith insufficient cost-elasticity.STRATEGY RISKStrategy risk is the risk that the Bank’s share price may fall because ofits strategic decisions.LIQUIDITY AND REFINANCING RISKLiquidity and refinancing risk is the risk of the Bank being unable tofulfil its obligations at an acceptable price in a given place and currency.INSURANCE SUBSCRIPTION RISKInsurance subscription risk corresponds to the risk of a financial losscaused by an adverse trend in insurance claims. Depending on the typeof insurance business (life, personal risk or annuities), this risk may bestatistical, macro-economic or behavioural, or may be related to publichealth issues or natural disasters. It is not the main risk factor arisingin the life insurance business, where financial risks are predominant.2422012 Registration document and annual financial report - BNP PARIBAS