2012 Registration document and annual financial report - BNP Paribas

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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
RISKS AND CAPITAL ADEQUACYMarket risk5Structural foreign exchange riskCurrency hedges are contracted by the ALM Department in respect of theGroup’s investments in foreign currencies and its future foreign currencyrevenues. Each hedging relationship is formally documented at inception.The documentation describes the hedging strategy, identifies the hedgeditem and the hedging instrument, and the nature of the hedged risk anddescribes the methodology used to test the expected (prospective) andactual (retrospective) effectiveness of the hedge.A hedging relationship is applied and documented for investments insubsidiaries and branches financed by foreign currency loans so as torecord movements in exchange rates symmetrically and avoid impactson the profit and loss account. These instruments are designated as netinvestment hedges.Fair value hedges are used to hedge the currency risk on equityinvestments in non-consolidated companies.During 2012, no net investment hedge relationship was disqualified.The Group hedges the variability of components of BNP Paribas’ earnings,in particular the highly-probable future revenue streams (mainly interestincome and fees) denominated in currencies other than the eurogenerated by the Group’s main businesses, subsidiaries or branches.Hedging of financial instruments recognised in thebalance sheet (F air V alue H edge )Fair value hedges of interest rate risks relate either to identified fixedrateassets or liabilities, or to portfolios of fixed-rate assets or liabilities.Derivatives are contracted to reduce the exposure of the fair value ofthese instruments to changes in interest rates.Identified assets consist mainly of available-for-sale securities; identifiedliabilities consist mainly of debt issued by the Group.Hedges of portfolios of financial assets and liabilities, constructed bycurrency, relate to:■ fixed-rate loans (property loans, equipment loans, consumer creditand export loans);■ fixed-rate customer deposits (demand deposits, funds deposited underhome savings contracts).To identify the hedged amount, the residual balance of the hedged item issplit into maturity bands, and a separate amount is designated for eachband. The maturity split is determined on the basis of the contractualterms of the transactions and historical observations of customerbehaviour (prepayment assumptions and estimated default rates).Demand deposits, which do not bear interest at contractual rates, arequalified as fixed-rate medium-term financial liabilities. Consequently,the value of these liabilities is sensitive to changes in interest rates.Estimates of future cash outflows are based on historical analyses. Noallowance is made prospectively for the effects of potential increases incustomer wealth or for the effects of inflation.For each hedging relationship, expected hedge effectiveness is measuredby ensuring that for each maturity band, the fair value of the hedgeditems is greater than the fair value of the designated hedging instruments.Actual effectiveness is assessed on an ex-post basis by ensuring that themonthly change in the fair value of hedged items since the start of themonth does not indicate any over-hedging.Cash Flow HedgeIn terms of interest rate risk, the Group uses derivative instruments tohedge fluctuations in income and expenses arising on floating-rate assetsand liabilities. Highly probable forecast transactions are also hedged.Hedged items are split into maturity bands by currency and benchmarkinterest rate. After factoring in prepayment assumptions and estimateddefault rates, the Group uses derivatives to hedge some or all of the riskexposure generated by these floating-rate instruments.In terms of foreign exchange risk, the Group hedges against variabilityin components of consolidated earnings. In particular, the Group mayhedge future revenue flows (especially interest and fee/commissionincome) derived from operations carried out by its main subsidiariesand/or branches in a currency other than their functional currencies. Asin the case of interest rate hedges, the effectiveness of these hedgingrelationships is documented and assessed on the basis of forecastmaturity bands.The table below concerns the scope of BNP Paribas SA’s medium- andlong-term transactions and shows the amount of hedged future cashflows (split by forecast date of realisation), which constitute the majorityof the Group’s transactions.52012 Registration document and annual financial report - BNP PARIBAS 299
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2012REGISTRATION DOCUMENTAND ANNUAL
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2012 Registration documentand annua
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1GROUP PRESENTATION1.1 Group presen
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GROUP PRESENTATIONPresentation of a
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1GROUPPRESENTATIONBNP Paribas and i
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1GROUPPRESENTATION1282012 Registrat
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2CORPORATEGOVERNANCEBoard of Direct
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2CORPORATEGOVERNANCEReport of the C
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2CORPORATEGOVERNANCEExecutive Commi
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32012REVIEW OF OPERATIONSBNP Pariba
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32012REVIEW OF OPERATIONSCore busin
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32012REVIEW OF OPERATIONSBalance sh
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32012REVIEW OF OPERATIONSProfit and
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32012REVIEW OF OPERATIONSProfit and
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32012REVIEW OF OPERATIONSOutlook3.6
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32012REVIEW OF OPERATIONSLiquidity
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4CONSOLIDATEDFINANCIAL STATEMENTS -
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5RISKSAND CAPITAL ADEQUACY5.6 Count
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5RISKSAND CAPITAL ADEQUACYAnnual ri
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5RISKSAND CAPITAL ADEQUACYCapital m
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5RISKSAND CAPITAL ADEQUACYRisk mana
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5RISKSAND CAPITAL ADEQUACYCredit ri
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7ARESPONSIBLE BANK: INFORMATION ON
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8GENERALINFORMATIONDocuments on dis
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8GENERALINFORMATIONFounding documen
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8GENERALINFORMATIONStatutory Audito
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8GENERALINFORMATIONStatutory Audito
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9STATUTORYAUDITORSStatutory Auditor
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10PERSON RESPONSIBLE FOR THE REGIST
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11TABLE OF CONCORDANCEHeadings as l
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HEAD OFFICE16, boulevard des Italie
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