2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYCredit risk5Most of the Group’s central government and central bank counterpartiesare of very high credit quality and based in developed countries, meaningthat they have very good internal ratings and very low average LossGiven Default.The majority of the Group’s corporate commitments concernscounterparties of excellent or good quality, reflecting the large part ofmultinationals in BNP Paribas’ customer base. Others exposures aremainly structured transactions or transactions secured by high-qualityassets, reflected in their average LGD levels.RETAIL BANKING OPERATIONS [Audited]Retail banking operations are carried out by the BNP Paribas networkof branches in France and by various subsidiaries, particularly in Italy,Belgium and Luxembourg, as well as by BNP Paribas Personal Finance.The Standard Ratings Policy for Retail Operations (SRPRO) providesa framework allowing Group core businesses and Risk ManagementDepartments to assess, prioritise and monitor credit risks consistently.This policy is used for transactions presenting a high degree of granularity,small unit volumes and a standard risk profile. Borrowers are assignedscores in accordance with the policy, which sets out:■ standard internal ratings based principles, underlining the importanceof a watertight process and its ability to adapt to changes in the creditenvironment;■ principles for defining homogeneous pools of credit risk exposures;■ principles relative to credit models, particularly the need to developdiscriminating and understandable models, and to model or observerisk indicators downstream in order to calibrate exposures. Riskindicators must be quantified based on historical data covering aminimum period of five years, and in-depth, representative sampling.All models must be documented in detail.The majority of FRB’s retail borrowers are assigned a behavioural scorewhich serves as a basis to determine the probability of default and, foreach transaction, the Global Recovery Rate (GRR) and Exposure at Default(EAD). These parameters are calculated monthly on the basis of the latestavailable information. They are drilled down into different scores andmade available to the Commercial f unction, which has no involvementin determining risk parameters. These methods are used consistently forall retail banking customers.For the portion of the BNP Paribas Personal Finance book eligible forthe IRBA, the risk parameters are determined by the Risk ManagementDepartment on a statistical basis according to customer type andrelationship history.Scoring techniques are used to assign retail customers to risk groupspresenting the same default risk characteristics. This also applies tothe other credit risk inputs: Exposure at Default (EAD) and Loss GivenDefault (LGD).The chart below shows a breakdown by credit rating of performing loansand commitments in the retail book for all the Group’s business lines,measured using the internal ratings based approach.This exposure represented EUR 188 billion of the gross credit risk at31 December 2012, lightly decreased compared with 31 December 2011(EUR 192 billion).2582012 Registration document and annual financial report - BNP PARIBAS