2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYMarket risk5■■■■■■Scenario 3: generic emerging market crisis designed to test globalrisk of these markets.Scenario 4: credit crunch, leading to a general risk aversion.Scenario 5: Euro crisis, progression of the current Euro Crisis withlow GDP, potential threat of a country leaving the Euro and asignificant weakening of the currency.Scenario 6: Oil s hock scenario driven by severe geopolitical turmoilwithin the Middle East region with severe consequences on energymarkets.Scenario 7: US c risis scenario, mostly based on a structural US crisisspreading towards close economic partners.Scenario 8: Risk-on scenario: rally in equity and emerging markets,low realised volatility and drop in implied volatility in all markets(effectively a return to risky assets).■ Micro Level Scenarios or “bottom up”: i nstead of looking at the effecton the global portfolio, these types of scenarios aim to highlight riskexposures on specific trading desks, regions or risk concentrations.This “bottom-up” approach enables the use of more complex stressscenarios and hence allows the detection of areas of potential losseswhich may not be easily achieved under the global macro scenarios(such as complex market dislocations or idiosyncratic risk). Thisprocess facilitates the classification of risk areas into less liquid orstructural exposures.It is the analysis of the above scenarios which enables the AdverseScenario for the trading books to be constructed. These official globalstress scenarios are presented at each capital markets risk committeealong with the Adverse Scenario and any bottom up stress test yieldingsignificant results.The results of all stress tests are reviewed regularly by ExecutiveManagement and sent to the Board of Directors. Compared with theprevious year, the results of the macro tests revealed lower impacts.They simulate directional shocks which only make up a small part of anoverall set of more sophisticated stress tests. It is no longer meaningful topresent the results of the macro tests in isolation and they have thereforebeen removed from this document.The scenarios take market liquidity into account by simulating the dryingup of certain assets or product liquidity as the stress event unfolds.To understand this process, it can be simplified by considering anapproach where the time horizon for the stress shock can vary betweendifferent instruments/assets (hence more advanced scenarios can takecertain idiosyncratic factors into account). Moreover, it may sometimesbe required to quantify the impact of a stress event occurring with rehedgingassumptions factored into part of the exposure under stress.Stress Testing is governed by the Capital Markets Stress TestingSteering Committee (STSC). The committee meets monthly and sets thedirection of all internal risk departmental stress scenario developments,infrastructure, analysis and reporting. The STSC governs all internalstress testing matters relating to both market and counterparty riskand decides upon the detailed definition of the CMRC official Stress Tests.Whilst stress testing is the core element of the tail risk analysis of thebooks, it complements the analysis of the change in sensitivities of theportfolios following market movements.MARKET RISK RELATED TO BANKING ACTIVITIESThe market risk related to banking activities encompasses the risk of losson equity holdings on the one hand, and the interest rate and foreignexchange risks stemming from banking intermediation activities on theother hand. Only the equity and foreign exchange risks give rise to aweighted assets calculation under Pillar 1. The interest rate risk fallsunder Pillar 2.Interest rate and foreign exchange risks related to banking intermediationactivities and investments are managed by the ALM-Treasury Department.At Group level, ALM-Treasury reports directly to one of the Chief OperatingOfficers. Group ALM-Treasury has functional authority over the ALM andTreasury staff of each subsidiary. Strategic decisions are made by theAsset and Liability Committee (ALCO), which oversees ALM-Treasury’sactivities. These committees have been set up at Group, division andoperating entity level.EQUITY RISKThe following table gives a breakdown of the Group’s equity risk exposuresby investment objective.2942012 Registration document and annual financial report - BNP PARIBAS