2012 Registration document and annual financial report - BNP Paribas

RISKS AND CAPITAL ADEQUACYCredit risk5RATING SYSTEMThe BNP Paribas Group uses an advanced Internal Ratings-BasedApproach (IRBA) to credit risk for the retail, sovereign, institutions,corporate and equity asset classes to calculate the regulatory capitalrequirements for Corporate and Investment Banking, French RetailBanking, part of BNP Paribas Personal Finance, BNP Paribas Fortis, BGLand BNP Paribas Securities Services (BP2S). For other businesses, thestandardised approach is used to calculate regulatory capital basedon external ratings. Each counterparty is rated internally by the Groupusing the same methods, regardless of the approach used to calculateregulatory capital requirements.The Bank has a comprehensive internal rating system compliantwith regulatory requirements regarding capital adequacy. A periodicassessment and control process has been deployed within the Bankto ensure that the system is appropriate and correctly implemented.The system was formally validated by the French banking supervisor(Autorité de Contrôle Prudentiel) in December 2007. For corporate loans,the system is based on three parameters: the counterparty’s probabilityof default expressed via a rating, the Global Recovery Rate (or Loss GivenDefault), which depends on the structure of the transaction, and theCredit Conversion Factor (CCF), which estimates the off-balance sheetexposure at risk.There are twelve counterparty ratings. Ten cover performing clients withcredit assessments ranging from “excellent” to “very concerning”, andtwo relate to clients classified as in default, as per the definition by thebanking supervisor.For Corporate counterparties, the rating parameters and GRR applicableto each exposure are reviewed at least once a year as part of the loanapproval process or annual credit review, drawing on the combinedexpertise of business line staff and, as a second pair of eyes, the GRMrepresentatives (who have the final say in case of disagreement). Highquality tools have been developed to support the rating process, includinganalysis aids and credit scoring systems. The decision to use these toolsand the choice of technique depends on the nature of the risk. For Retailcounterparties, rating methods are applied automatically to determinethe loan parameters.➤ TABLE 10: INDICATIVE MAPPING OF INTERNALCOUNTERPARTY RATING WITH AGENCY RATINGSCALEInvestment GradeNon Investment GradeDefaultI nternalBNPP RatingLT Issuer/Unsecuredissuer ratingS&P/Fitch1+ AAA1 AA+1- AA2+ AA-2 A+/A2- A-3+/3/3- BBB+4+/4/4- BBB5+/5/5- BBB-6+ BB+6/6- BB7+/7 BB-7- B+8+/8/8- B9+/9/9- B-10+ CCC10 CC10- C11 D12 DThe Group has developed an indicative equivalence between theBank's intenal ratings and the long-term issuer ratings assigned bythe major rating agencies. The Bank has a much broader clientele thanjust those counterparties rated by an external agency. An indicativeequivalence is not relevant in retail banking. It is used when the internalratings are assigned or reviewed in order to identify any differencesbetween the Bank's assessment of a borrower's probability of defaultand that of one or more of the rating agencies. However, the internalratings do not aim to reproduce or even approximate the external ratings.There are significant variances in both directions within the portfolio.Some counterparties rated 6 or 7 by BNP Paribas could be consideredInvestment Grade by the rating agencies.52012 Registration document and annual financial report - BNP PARIBAS 249