2012 Registration document and annual financial report - BNP Paribas

RISKS AND CAPITAL ADEQUACYOperational risk55.10 Operational riskRISK REDUCTION AND HEDGING POLICY [A udited]RISK MANAGEMENT FRAMEWORKRegulatory frameworkOperational risk management is governed by a strict regulatoryframework:■ Basel Committee Regulation, which requires the allocation of capitalto operational risk;■ Regulation CRBF 97-02 as amended, which requires implementation ofa risk management system covering all types of risk and an internalcontrol system that ensures the effectiveness and quality of the Bank’sinternal operations, the reliability of internal and external information,the security of transactions and compliance with all laws, regulationsand internal policies.➤ FIGURE 10 : EVALUATION PROCESS OF OPE RATIONA L RISKObjectives and principlesTo meet this dual requirement of measuring and managing operationalrisk, BNP Paribas has developed a five-stage iterative risk managementprocess:■ identifying and assessing operational risks;■ formulating, implementing and monitoring the risk mitigation system,including procedures, checks and all organisational elements designedto help to control risk, such as segregation of tasks, management ofaccess rights, etc.;■ producing risk measures and calculating the capital charge foroperational risk;■ reporting and analysing oversight information relating to theoperational permanent control process;■ managing the system through a governance framework that involvesmembers of management, preparing and monitoring action plans.5ReportingLeft/middlesquare riskmeasurementProcess &OrganisationControlsMonitoringRisk identification and assessmentThere are two key components to the system, which are structuring inscope and illustrate the complementary nature of the Group’s operationalrisk and permanent control systems:■ calculating capital requirements for the BNP Paribas scope is based ona hybrid approach that combines an internal model for the majorityof entities with the standardised or basic approach for other entitiesdepending on their level of maturity. Under the Advanced MeasurementApproach (AMA), loss distributions are modelled and calibrated usingtwo sets of data: historical event data since 2002 for the BNP ParibasGroup and the major international banks, and internally constructedpotential event scenarios to take better account of the extreme risksto which the Bank is exposed. This model was approved by the Frenchbanking supervisor (Autorité de Contrôle Prudentiel) in 2008. It hasbeen gradually extended within the Group and, particularly in 2012,to a large number of entities from the ex-Fortis scope;2012 Registration document and annual financial report - BNP PARIBAS 309