2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYMarket risk➤ TABLE 47: SENSITIVITY OF REVENUES TO GENERAL INTEREST-RATE RISK BASED ON A 100 BASIS POINT INCREASEIN INTEREST RATES31 December 2012In millions of eurosEuros Other currencies TotalSensitivity of 2012 revenues 354 10 36431 December 2011In millions of eurosEuros Other currencies TotalSensitivity of 2011 revenues 224 119 3435Since the books of financial instruments resulting from the Group’sbanking intermediation activities are not intended to be sold, they arenot managed on the basis of their value. Nonetheless, the sensitivity ofthe value of these books is calculated in order to measure the overallinterest-rate risk over all time horizons. The sensitivity of the value to a200 basis point increase in interest rates is 6.8% of the Group’s regulatorycapital, compared with the limit of 20% laid down in the Basel regulations.HEDGING OF INTEREST RATE AND FOREIGNEXCHANGE RISKS [A udited]Hedging relationships initiated by the Group mainly consist of interestrate or currency hedges using derivative financial instruments (swaps,options and forwards).Depending on the hedging objective, derivative financial instrumentsused for hedging purposes are qualified as either fair value hedges,cash flow hedges, or hedges of net investments in foreign operations.Each hedging relationship is formally documented at inception. Thedocumentation describes the hedging strategy, identifies the hedgeditem and the hedging instrument, and the nature of the hedged risk;and describes the methodology used to test the expected (prospective)and actual (retrospective) effectiveness of the hedge.Interest rate risk in the banking bookThe Bank’s strategy for managing global interest-rate risk is based onclosely monitoring the sensitivity of the Bank’s earnings to changes ininterest rates, factoring in all interest-rate risks. This procedure requiresan extremely accurate assessment of the risks incurred so that the Bankcan determine the most appropriate hedging strategy, after taking intoaccount the effects of netting the different types of risk. These hedgingstrategies are defined and implemented by entity and by currency.The hedges comprising swaps and options are typically accounted foras fair value hedges or cash flow hedges. They may also take the formof government securities and are mostly accounted in the “Available ForSale” category.The exceptional measures introduced by the ECB in December 2011(LTROs and sovereign debt buyback plan) had the effect of easing liquidityand credit spreads in 2012. However, the economic outlook in the eurozone remained uncertain, causing interest rates to fall to record lows.When the ECB cut its key rate in July, Eonia fell to below 10 bp, whilstlong rates fell relatively regularly throughout the year. In this climate, itis important to note that European inflation remained above 2%.■ In France the deposit to loan ratio improved further in 2012 andthe interest rate structure of loans changed gradually following aslowdown in mortgage origination and an increase in the maximumlimit on the Livret A passbook account, which is affected by aninflation-related risk.■ The Belgian and Luxembourg branch networks have a deposit to loanratio in excess of 100%. Their main focus in terms of interest rate riskin 2012 was therefore on hedging savings accounts, volumes of whichcontinued to grow.Broadly-speaking, the prolonged decline in interest rates put pressure onintermediation margins in the branch networks. This trend was reinforcedby the introduction of floor rates on savings accounts due to regulatoryconstraints (floor inflation on Livret A passbook accounts in France) andvery short-term market rates of close to 0%. Against this background,the Group adapted its hedging policy to the environment, either throughswaps or options. Special attention was also paid to hedging basis riskdue to index differences.The hedges comprising derivatives and options are typically accountedfor as fair value hedges or cash flow hedges. They may also take the formof government securities and are mostly accounted in the “Available ForSale” category.2982012 Registration document and annual financial report - BNP PARIBAS