2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYRisk managementSTRESS TESTING5OVERALL ARCHITECTURETo ensure dynamic risk supervision and management, the Group hasimplemented a comprehensive stress testing framework in line withthe guidance issued by the European Banking Authority (EBA) in 2010,as described below.Stress testing frameworkStress testing forms an integral part of the risk management system andis used in three main areas: forward-looking risk management, capitalplanning, and regulatory requirements, mainly through the Group’s andits main entities’ ICAAP:■ forward-looking risk management: the results of stress tests carriedout using a top down approach are used to build the Bank’s risk profileand are periodically submitted to Group Executive Management,including the Board’s Internal Control, Risk Management andCompliance Committee through the quarterly Group Risk Dashboard.Additionally, ad hoc stress testing is performed, when appropriate,within Risk Policy Committees or Country Strategic Committees so as toidentify and assess areas of vulnerability within the Group’s portfolios;■ budgeting and capital planning: stress tests are carried out annually aspart of the budget process and included in the ICAAP. They are reviewedat divisional and business line level before being consolidated at Grouplevel to provide a synoptic view of the impact on the Bank’s capitaland earnings, thus following a bottom up approach;■ regulatory requirements or requests: mainly ad hoc requests from theEBA, IMF or any other supervisor (1) .This system has an established governance framework with responsibilitiesclearly divided between operational entities – to encourage operationalintegration and relevance – and the Group Finance, Risk Managementand ALM Departments, which ensure overall coherence.Stress testing methodologies (sensitivity analyses or analyses based onmacroeconomic scenarios) are tailored to the main categories of risk andsubject to independent review by GRM.Stress testing may be done at Group, business line or portfolio level,based on one or more risk types and on a larger or smaller number ofvariables depending on the desired objective. Where appropriate, resultsof quantitative models may be adjusted on the basis of expert judgement.The scenarios used, stress test outcomes and any recommendedcorrective actions (reducing exposures to a sub-segment, revising thefinancing or liquidity policy, etc.) are reviewed by GRM and/or ExecutiveManagement.Since its creation, the Group’s stress testing framework has evolvedcontinuously in order to integrate the most recent developments in stresstesting, whether in terms of methodologies or improved operationalintegration in the Group’s management processes. The budget stresstests presented below are provided as an illustration.B udget stress testing: a joint GRM, Finance and ALMapproachThe purpose of stress testing in the budget process is to assess the impactof an adverse macroeconomic scenario on the Group and its activities.Stress tests are run in parallel with the ann ual budget process, basedon the central economic scenario.The impact of the adverse scenario is measured through:■ P&L (NBI, cost of risk, etc.);■ risk-weighted assets;■ equity;■ liquidity and funding needs.The expected final output of the stress testing exercise is a Group stressedsolvency ratio, as well as possible adjustment measures, which might bedecided by businesses or at Group central level.Several teams are involved in preparing and managing the stress tests:divisions/operational entities, business lines, in liaison with the FinanceDepartment’s unit dedicated to capital, ALM and GRM.(1) http://www.acp.banque-france.fr/uploads/media/201301-stress-tests-systeme-bancaire-et-organismes-assurance-en-france.pdfhttp://www.imf.org/external/pubs/ft/scr/2012/cr12341.pdf2442012 Registration document and annual financial report - BNP PARIBAS