67 financial instrument (credit, debt instrument, collateral, etc.), the Bank records 12-month expected losses. • 2nd stage (Bucket 2): if the credit quality deteriorates significantly for a given transaction or portfolio, the Bank records the lifetime expected losses. • 3rd stage (Bucket 3): when one or several default events have occurred on the transaction or the counterparty having a negative impact on expected future cash flows, the Bank records an impairment. Then, if the conditions for classifying financial instruments in Bucket 3 are no longer met, the instruments are reclassified to Bucket 2, then to Bucket 1 depending on the subsequent improvement in the credit quality risk. The Bank does not intend to use value adjustments for expected credit losses in the case of individual value adjustments for impaired loans, if there is a need. Definition of default A debtor is considered to be in default when at least one of the two following conditions is met: • A significant past due payment, generally of more than 90 days, except when special circumstances demonstrate that its cause is not related to the debtor's situation. • The Bank considers it unlikely that the debtor will meet its credit obligations in full without having to take measures such as realising collateral. An outstanding in default (Bucket 3) is impaired when one or several events have occurred negatively impacting the expected future flows of this financial asset. Evidence of impairment of a financial asset encompasses the observable data related to one of the following events: • The issuer or borrower having significant financial difficulties. • A breach of a contract, such as a default or pastdue payment. • The granting, by one or more of the lenders to the borrower, for economic or contractual reasons related to the financial difficulties of the borrower, of one or several factors that the lender(s) would not have considered in other circumstances. • The increasing likelihood of bankruptcy or financial restructuring of the borrower. • The disappearance of an active market for the financial asset due to financial difficulties. • The purchase or origination of a financial asset at a sharp discount, which reflects the credit losses suffered. The defaulting counterparty is only returned to a healthy position after an observation period validating that the debtor is no longer in a default situation (assessment by the Risk Department). The notion of "ECL" - Expected Credit Losses ECL is defined as the discounted probabilityweighted estimate of credit losses (principal and interest). It corresponds to the present value of the difference between the contractual flows and expected flows (including the principal and interest). The calibration of the ECL is calculated according to the probability of default ("PD"), the loss given default ("LGD") and exposure at default ("EAD"). The ECL approach aims to anticipate early on the recognition of expected credit losses. Governance and measurement of the ECL The Risk Department at CACIB is responsible for defining the methodological framework and the supervision of the provisioning system for assets within the Group. The Group primarily uses the internal rating system and current Basel methods to generate the IFRS 9 parameters required to calculate the ECL. The assessment of the change in credit risk is based on a model of expected losses and the extrapolation on the basis of reasonable scenarios. The calculation formula includes the parameters of the probability of default, loss given default and exposure at default. These calculations are largely based on internal models used within the prudential framework when they exist, but with adjustments to determine an economic ECL. IFRS 9 provides for a "point in time" analysis while taking into account historical loss data and forward looking macroeconomic data. The 12-month expected losses are a portion of the lifetime expected losses, and they represent the cash flow shortfalls that result from default events on a financial instrument within the 12 months after the reporting date (or a shorter period if the expected lifetime of the financial instrument is less than 12 months), weighted by the probability of default within the next 12 months. The backtesting of the models and parameters used is done at least once a year. Significant deterioration in the credit risk The Bank must evaluate, for each financial instrument, the deterioration of the credit risk from the point that it was originated to the reporting date. This measurement of the change in credit risk leads the Bank to classify its transactions by category of risk (Buckets). In order to assess a significant deterioration, the Group provides for a process based on two levels of analysis: • A first level depending on relative and absolute quantitative et qualitative Group rules. • A second level linked to the measurement, by an expert on a forward looking local basis, of the risk carried by the Bank in its portfolios that can lead to an adjustment of the Group criteria for a declassification to Bucket 2 (moving a portfolio or sub-portfolio to lifetime ECL). The monitoring of the significant deterioration concerns each financial instrument. No contagion is required for moving the financial instruments of a same counterparty from Bucket 1 to Bucket 2. The monitoring of the significant deterioration must include the change in the credit risk of the main debtor without taking account of the collateral, including for transactions benefiting from a shareholder guarantee. To measure the significant deterioration in credit risk since initial recognition, it is necessary to find the internal rating and PD (probability of default) at origination.
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