2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYCredit risk5Loan applications must comply with the Bank’s Global Credit Policyand with any specific policies, and must in all cases comply withthe applicable laws and regulations. In particular, before making anycommitments BNP Paribas carries out an in-depth review of any knowndevelopment plans of the borrower, and ensures that it has thoroughknowledge of all the structural aspects of the borrower’s operations andthat adequate monitoring will be possible.The Group Credit Committee, chaired by one of the Chief OperatingOfficers or the Head of GRM, has ultimate decision-making authority forall credit and counterparty risks.DECISION-MAKING PROCEDURES – RETAILThe decision-making system for Retail Banking exposures is based ona system of discretionary limits whereby the Regional Risk Officersdecide jointly with the Head of the FRB b ranch Network (or his deputy)on all commitments to Business clients that exceed the powers of theBusiness Centre managers and on large retail commitments that exceedthe powers of the Group FRB branch managers. They have a right of veto,subject to appeal to the next authority level up.As regards ex post control over lending transactions, a GRM team isresponsible for:■ ex- post control over transactions approved at Retail Banking level onlyand over compliance with procedures;■ monitoring the Branch Network’s credit risk.MONITORING AND PORTFOLIOMANAGEMENT PROCEDURESMonitoring exposuresA comprehensive risk monitoring system is organised around Controlunits, which are responsible for ensuring that lending commitmentscomply with the loan approval decision, that credit risk reporting dataare reliable and that risks accepted by the Bank are effectively monitored.Daily exception reports are produced and various forecasting tools areused to provide early warnings of potential escalations of credit risks.The various monitoring levels, which generally reflect the organisationof discretionary lending authorities, are carried out up to the GroupDoubtful and WatchList Committee, under the supervision of GRM. Thiscommittee regularly examines all loans in excess of a given threshold,for which it decides on the amount of impairment losses to be recognisedor reversed, based on a recommendation from the business lines, withGRM’s approval. In addition, a quarterly committee reviews sensitive ornon-performing loans.Collective portfolio management and monitoringThe selection and careful evaluation of individual exposures is supportedby a reporting system based on more aggregated portfolio levels in termsof division/business line, country, sector, business/product.The collective portfolio management policy, including concentration ofrisk by borrower, sector and country, is based on this reporting systemand Group risk committees review all reports and analyses produced.1) For risk concentration by country, country risk limits are set at theappropriate level of delegated authority for each country. The Group,which is present in most economically active areas, in accordancewith its vocation, strives to avoid excessive concentrations of risk incountries whose political and economic infrastructure is acknowledgedto be weak or whose economic position has been undermined.2) Diversification of the portfolio by counterparty is monitored on aregular basis, notably under the Group’s individual risk concentrationpolicies. The risk concentration ratio also ensures that the aggregateexposure to each beneficiary (1) does not exceed 25% of the Group’s netconsolidated shareholders’ equity. BNP Paribas remains well belowthe concentration limits set out in the European Directive on LargeExposures.3) The breakdown of exposure by business sector is also monitoredcarefully and regularly. It is supported by a forward-looking analysisfor dynamic management of the Bank’s exposure. This analysis isbased on the in-depth knowledge of independent sector experts whoexpress an opinion on trends in the sectors they follow and identifythe factors underlying the risks faced by the main components. Thisprocess is adjusted by sector according to its weighting in the Group’sexposure, the technical knowledge required to understand the sector,its cyclicality and degree of globalisation and the existence of anyparticular risk issues.In addition, stress tests are used to identify vulnerable areas of theGroup’s portfolios and analyse any concentrations.Lastly, BNP Paribas may use credit risk transfer instruments, such assecuritisation programmes or credit derivatives, to hedge individual risks,reduce portfolio concentration or cap potential losses arising from crisisscenarios.SCOPE AND NATURE OF RISK REPORTINGAND MEASUREMENT SYSTEMSAll the processes and information systems used by the Credit RiskReporting Function were submitted for review to the French bankingregulator (Autorité de Contrôle Prudentiel).For BNP Paribas Fortis and BGL BNP Paribas, following convergence workcarried out between end-2010 and Autumn 2012, the entities in thesesub-scopes are now included in the Group systems for producing creditrisk calculations.(1) Large Exposures are exposures that individually exceed 10% of shareholders’ equity, with a disclosure threshold set by the ACP at EUR 300 million.2482012 Registration document and annual financial report - BNP PARIBAS