2012 Registration document and annual financial report - BNP Paribas

RISKS AND CAPITAL ADEQUACYOperational risk5APPROACH AND SCOPEThe Group Compliance Department has outlined the Group’s operationalrisk management approach, by delegation from the Risk ManagementDepartment. This approach uses an operational risk model scaled to beproportionate to the risk being incurred and aims to ensure that the vastmajority of operational risks are covered.The corresponding capital requirement is calculated for each legal entityin the BNP Paribas Group prudential scope. The amount of risk-weightedassets is calculated by multiplying the capital requirement by 12.5.BNP Paribas uses a hybrid approach combining the AdvancedMeasurement Approach (AMA), standardised approach, and basicindicator approach.For the Group, the AMA methodology has been deployed in the mostsignificant entities of each division or Retail Banking Operational entities.This includes most of Retail Banking in France and Italy, CIB, andInvestment Solutions. BNP Paribas Fortis and BGL BNP Paribas businesslines, as well as a few other ex-Fortis group subsidiaries, have also beenusing the Group’s AMA model since 2012.ADVANCED MEASUREMENT APPROACH(AMA)Under the Advanced Measurement Approach (AMA) for calculating capitalrequirements, the bank must develop an internal operational risk modelbased on internal loss data (historical and potential), external loss data,various scenarios analyses, environmental factors, and internal controls.BNP Paribas’ internal model meets the AMA criteria and includes thefollowing features:■ the model uses an aggregate annual loss distribution, meaning that thefrequency and severity of losses from operational risks are modelledusing an actuarial approach and according to distributions calibratedwith available data;■ it uses historical data as well as scenarii to calculate capitalrequirements, with a predominance for scenarii because they can beshaped to reflect severe risks;■ the model is faithful to its input data, so that its results can be usedeasily by each of the Group’s business lines. Most of the assumptionsare therefore included in the data themselves;■ it is prudent in its capital requirement calculations. The input data arethoroughly reviewed, and any supplemental data are added if neededto cover all relevant risks within the Group.The AMA uses VaR (Value at Risk), or the maximum potential loss overone year, at a 99.9% confidence level to calculate regulatory capitalrequirements.Capital requirements are calculated on an aggregate level using datafrom all Group entities that have adopted the AMA, then allocated toindividual legal entities.FIXED-PARAMETER APPROACHESBNP Paribas uses fixed-parameter approaches (basic or standardised)to calculate the capital requirements for entities in the Group’s scope ofconsolidation that are not integrated in the internal model.Basic indicator approach: The capital requirement is calculated bymultiplying the entity’s average net banking income (the exposureindicator) over the past three years by an alpha parameter set by theregulator (15% risk weight).Standardised approach: The capital requirement is calculated bymultiplying the entity’s average net banking income over the past threeyears by a beta factor set by the regulator according to the entity’sbusiness category. Therefore in order to use the banking supervisor’s betaparameters, the Group has divided all its business lines into the eightbusiness categories, with each business line assigned to these categories,without exception nor overlap.52012 Registration document and annual financial report - BNP PARIBAS 313