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69
RISK

MANAGEMENT

RISK MANAGEMENT STRUCTURE

Page 70

RISKS

Page 73

MANAGING RISKS SPECIFIC TO INSURANCE

Page 85

INFORMATION ON BASEL III

PILLAR III

Page 87

70 - ANNUAL REPORT 2017

PRESENTATION OF THE CMNE GROUPGOVERNANCEACTIVITY REPORTSOCIAL & ENVIRONMENTAL RESPONSIBILITYFINANCIAL REPORTLEGAL AND ADMINISTRATIVE INFORMATION

RISK MANAGEMENT

RISK MANAGEMENT STRUCTURE

RISK MANAGEMENT

STRUCTURE

RISK MANAGEMENT - CONTROL - AUDIT

Internal control is structured on three levels. The ?rst-level operational control is carried out by the operational sta?,

or may be integrated into the information systems' automated checks and processes. The second level is organized

around central structures dealing with risk management, permanent control and information system security, the

compliance and anti-money laundering and terrorist ?nancing function, as well as dedicated units within each of the

CMNE Group's businesses. Centrally, actions are coordinated by the Permanent Control and Compliance Committee,

the Basel Committee and the Operational Risks Committee, which are chaired by the Group Chief Risk Oficer.

RI SK MANAGEMENT

Ram ped up the training program for federal directors;• P repared the CMNE Group's risk appetite statement; I mproved the cross-functional view of the risks within the Group; I dentied the risk factors to which the portfolios are exposed and implemented appropriate measurement tools; C arried out prospective risk analysis; A nalyzed the risks associated with the CMNE Group's new products, funds or counterparties.

Consolidated risk management framework

Cornerstones of the framework:

Capital adequacy (ICAAP)ORSALiquidity adequacy (ILAAP)

Pr ospective risk analysis:

Me asuring and monitoring

liquidity

Quality of credit

risks:Sector/unit concentrationSovereign riskBalance sheet ratiosShort-term liquidity

Adequacy of the standard

formula proleMarket riskInterest rate riskInsurance (ORSA)Increased renancing costsTransformation

Operational riskReputational risk

Denition of company risk

appetite • Det ermining economic capital requirements by assessing internal stress tests P rojecting capital adequacy in relation to requirements based on the Medium-Term Plan (MTP) Internal stress tests to verify liquidity adequacy M easuring liquidity adequacy under normal and stress conditions

Prospective solvency

assessment - measurement of resistance to stress tests 71

PRESENTATION OF THE CMNE GROUPGOVERNANCEACTIVITY REPORTSOCIAL & ENVIRONMENTAL RESPONSIBILITYFINANCIAL REPORTLEGAL AND ADMINISTRA TIVE INFORMATION

RISK MANAGEMENT

RISK MANAGEMENT STRUCTURE

Consolidated risk monitoring

Limits and warning thresholds

Crisis Recovery

Plan (CRP) Liquidity adequacy (ILAAP)

Managing the following risks: credit, market, interest rate, liquidity, insurance, operational and non-banking; (Crisis Recovery Plan); for significant incidents: • Pr esented to the RISK Committee;• R isk reporting, analysis of equity and of credit risk, and monitoring of risks related to capital markets activities, operational risks, major risks and insurance risk; S tress tests on credit, interest rate, market and liquidity risk: quantified and presented to the Risk Committee; : at which level of deterioration will all excess capital be consumed?

CNCM's Executive

Management is

informed and, where relevant, decisions are taken by the e?ective managers • To pics covered:

ProtabilityRisk quality SolvencyLiquidity

COM PLIANCE CONTROL

The reports to the Group

Risk Department and organizes the system's management in accordance with its three main responsibilities: E nsuring that procedures, products and services are developed in accordance with the legislation and regulations. The department is therefore required, in conjunction with the legal department, to monitor and circulate information on regulatory developments, to implement and circulate compliance standards and procedures and to ensure that the compliance or specic business line applications comply with the regulations; T he company's image: this requires it to draw up and update the mapping of compliance risk and, in connection with this, to assess and control reputational risk, to train, inform, and provide advice to sta on compliance matters, and to detect and correct any shortcomings; L astly, protecting customers' interests, by approving and controlling new products, services or activities, and by drawing up and monitoring a conict of interest mapping, and ensuring all sta comply with the code of ethics, the upkeep of which is the department"s responsibility, by controlling the handling of customers' complaints. As far as permanent control is concerned, Compliance Control is responsible for the Bankinsurance France scope but it also ensures permanent control is implemented throughout the CMNE Group's subsidiaries through ongoing supervision of the actions of these entities and by verifying the quality of the controls carried out by each CMNE Group company. In particular, the degree to which subsidiaries' new products are supervised was increased during 2017.

Co mpliance control as it applies to the

Bankinsurance France division

- this takes various forms: A ll employees to which the compliance awareness modules apply are enrolled in an e-learning training module. Nearly 80
% o f the employees concerned have already completed the module; Y oung employees, on completion of their initial training program, undertake a session covering compliance culture and ethical rules. This session also covers the whistleblowing policy and related procedures. E mployees taking up a position subject to the General Regulation issued by the French Financial Markets Authority (Autorité des Marchés Financiers - AMF): the level of their knowledge is veried and they then follow a training program leading to a certied qualication. More generally, all employees aected by implementation of the MiFID II regulation have been enrolled in an e-learning training program consisting of ve modules, the aim of which is to give them an understanding of the main regulatory developments in the area and of the new tools that will be rolled out, notably the new questionnaire to be used to obtain from customers information about them that is useful and necessary for determining their investor prole; T he legal and compliance departments jointly monitor legal information and forward relevant information to the business lines for inclusion in internal procedures. Information gained as a result of this monitoring is also used to keep employees informed of developments in this area. Such information is circulated to the entities concerned but it also published regularly on the company's intranet and therefore made available to all employees.

72 - ANNUAL REPORT 2017

PRESENTATION OF THE CMNE GROUPGOVERNANCEACTIVITY REPORTSOCIAL & ENVIRONMENTAL RESPONSIBILITYFINANCIAL REPORTLEGAL AND ADMINISTRATIVE INFORMATION

RISK MANAGEMENT

RISK MANAGEMENT STRUCTURE

As sessing and controlling

reputational risk Reputational risk is analyzed and monitored by means of a number of mechanisms: T he procedure for approving and controlling new products, services or activities; M onitoring regulatory developments: by controls making it possible to verify that developments and new regulations have been taken into account in the company's procedures; C entralizing shortcomings, including the monitoring of customer complaints; U pdating the main compliance risk mappings; T he conict of interest management policy, the risk mapping and the prevention mechanisms applied; M onitoring transactions for the purposes of the procedures relating to personal transactions carried out by sensitive employees, detecting suspected market abuse transactions and managing watch lists or blacklists.

Ot her compliance risks

(banking and financial ethics) Procedures have been drawn up governing employees' personal transactions in financial instruments and the detection of suspected market abuse transactions. These procedures are subject to permanent controls.

Pr ocedures enabling breaches,

infringements and shortcomings to be reported The "whistleblowing policy" is included in the code of ethics published on the company's intranet. This procedure specifies the instructions given to an employee faced with a shortcoming or a doubt and indicates to whom he or she can refer the matter.

Ce ntralizing and implementing remedial

and monitoring measures The procedure for "centralizing shortcomings" enables shortcomings identified within the company to be reported. Throughout the Group's entities, shortcomings are reported by means of the operational risk reporting channels. The Group Operational Risks Committee to which all entities report is responsible for reviewing claims and incidents, and for controlling and implementing remediation plans. The Operational Risks Committee's analyses and findings are reported to the Federal Risks Committee and then to the CMNE Federal Board of Directors. In addition, the Permanent Control and Compliance Committee is responsible for the e?ciency of the operational processes and a process for following up corrective actions plans is set up during its meetings. The Group Chief Risk O?cer is informed without delay of all material shortcomings and of the decisions and actions implemented to remedy them.

MONE Y LAUNDERING RISK

Ri sk classification (AML-CTF)

A risk classification is drawn up for the CMNE Group's various activities and is updated to include changes in the regulations. The impacts of the Fourth Anti-Money Laundering Directive have been analyzed from an operational standpoint. The CMNE Group has lists of sensitive countries, persons subject to international sanctions, and asset freezes, which are regularly updated. It also has embargo questionnaires and specific customer codes. In the case of the Banking France, Asset Management and Insurance divisions, the risk approach excludes light risk (Art R561-15(1)), except in the case of the leasing and property and casualty insurance activities. The first level of risk is therefore normal risk (Articles L561-5 and L561-6). Normal risk requires the customer relationship manager to apply the due diligence obligations relating to the customer's identity and address and the nature and purpose of the business relationship. Risk is deemed to be high if the customer is in one of the categories specified as high risk by the legislation and regulations (Politically Exposed Persons - PEPs, a product or transaction of significant value, a transaction that is complex or does not appear to have any economic justification or lawful purpose, a customer or customer's legal representative who is not physically present for identification purposes, a product or transaction favoring anonymity, or a transaction or customer with a link to a red list country) or an internal category (AML-CTF risk) or if the customer's name is on the terrorist list. In such cases, the new business relationship or transaction must be approved by management, or even by Executive Management in the case of PEPs, without prejudice to the other due diligence procedures that will apply, which will depend on the circumstances of the case concerned. Each

CMNE Group entity has its own risk mappings.

Impr oving the system

at CMNE Group level The work carried out by the 2020 Medium-Term Plan Working Group on AML-CTF is now complete and enabled a framework CMNE Group procedure to be drawn up. The procedure was approved in early 2018. It enabled consistent AML-CTF practices to be implemented within all Group entities, improved the manner in which supervision by the central AML-CTF function is structured and supplemented the existing monthly monitoring, as regards the following topics in particular: Fi les with enhanced due diligence procedures, PEPs, terrorist topics and embargo/asset freezing topics; E mployee training and information; P rocedures and updates in respect of high-risk customers; Q ualitative and quantitative monitoring of warnings, analysis les and suspicious transaction reports. 73

PRESENTATION OF THE CMNE GROUPGOVERNANCEACTIVITY REPORTSOCIAL & ENVIRONMENTAL RESPONSIBILITYFINANCIAL REPORTLEGAL AND ADMINISTRA TIVE INFORMATION

RISK MANAGEMENT

RISKS

Pro jects in progress

The Group continued to implement continuous improvement measures concerning the AML-CTF system. These measures enabled the following to be implemented during 2017: T he 2018 Customer Member Priority Project, which launched the development of the Know Your Customer (KYC) e-procedures; P rojects to develop the information system, comprising the automation, via the decision support tool, of the controls performed when entering into a new business relationship, and changes to the monitoring procedures: new warning generation processes are being developed which will include more information about customers at an earlier stage.

PERMANENT CONTROL - INFORMATION SYSTEM SECURITY

Reporting to the Group Risk Department, the Group

Permanent Control Department is responsible for

coordinating the control plans and for implementing and developing methods and tools. All entities' control plans, including second-level permanent controls, are regularly adapted in light of their activities and the risks to which they are exposed. In the case of controls performed centrally, various controls have been enhanced. The controls concerned relate mainly to loans, financial activities, payment flows and means, and the monitoring of subsidiaries. In addition, the systems implemented within the subsidiaries (Beobank, Groupe La Française and the Insurance division) have also been adapted and improved. As regards information system security, several projects are in progress that are helping to improve the Group's risk management and regulatory compliance procedures. The main projects include the review of the IT charters, training and raising the awareness of employees, updating the risk mappings, and the project to ensure compliance with the

European personal data protection regulations.

TH E THIRD LEVEL: PERIODIC CONTROL

Group Audit Inspection , in accordance with the Group Periodic Control Charter, ensures the consistency, completeness and e?ectiveness of the internal control systems and the risk measurement, monitoring and management processes. Its responsibilities in this area cover all the CMNE Group's entities and business lines.

Its responsibilities relate mainly to:

P eriodic control of the Bankinsurance France sales network; A uditing CFCMNE's central departments and business lines, and the subsidiaries; C ertifying the local banks' individual nancial statements; Fr aud and special matters. The work carried out by Group Audit Inspection in 2017 included: 3

0 audit assignments (28 relating to local banks and two

carried out on Business Advice Spaces) as well as 65 follow-up assignments; S ix thematic and business line audits of the Bankinsurance

France network;

C ertifying the individual nancial statements of 154 local banks; 3

2 business line audit assignments, and monitoring the

implementation of the recommendations made for all the

Group's divisions.

As regards Beobank, its internal audit department, whose manager reports to CMNE's General Inspector, carried out

102 inspections of branches and delegated agents, and nine

business line audit assignments. Lastly, the fraud and special matters function analyzed more than 600 cases of external fraud and 268 cases of rude behavior by the French network's customers. RISKS

CRE DIT RISK

Loan origination is governed by procedures and standards specific to each of the entities in the CMNE Group's Banking division. These procedures and standards are themselves tailored to the CMNE Group's risk appetite and risk policy. The fundamental principle on which the loan origination procedures are based is Beobank's score for consumer loans or the internal rating (Crédit Mutuel Group's Internal Rating System) for the French Banking Network and Corporate divisions. The tiered pricing system for loans and the system for delegating authority are tailored based on this internal rating. In the case of the French Banking Network, an application for a loan (a consumer, home or business loan) must receive a favorable technical opinion (concerning compliance with the rules and conditions laid down by the Federation and the perception of the risks associated with the application) from the employee concerned within the limits granted by the Chief

Executive O?cer. The six delegation levels for technical opinions given (based on the employee's level of expertise) are amounts set for customers based on the internal pivot rating. Their weighting is increased or decreased depending on the rating. The classification of a loan as non-performing removes it totally from the sales department's sphere of authority.

Applications whose individual amount exceeds €1.25 million or which would result in a counterparty's total outstanding loans exceeding that amount must be the subject of a decision by the e?ective managers. In the Corporate Banking network, the overall limit for a counterparty or group of counterparties is €30 million.

74 - ANNUAL REPORT 2017

PRESENTATION OF THE CMNE GROUPGOVERNANCEACTIVITY REPORTSOCIAL & ENVIRONMENTAL RESPONSIBILITYFINANCIAL REPORTLEGAL AND ADMINISTRATIVE INFORMATION

RISK MANAGEMENT

RISKS Caisse Fédérale de Crédit Mutuel Nord Europe assists the Corporate network by counter-guaranteeing outstandings due from a counterparty or group of counterparties that exceed the €30 million limit. In 2017, a system of personal loan approval powers was introduced at BCMNE. Beyond these delegation levels, the Corporate network's Credit Committees initiate a process that involves the CMNE Group's Credit Department and the e?ective managers. The Corporate network's Credit Committees review and decide on whether to grant loan applications referred by delegation of authority scopes governed by the credit rules of the network's various entities. Their scopes cover the entire Corporate network and their composition varies depending on the application amounts. These Committees become involved

in cases where weighted outstandings exceed €1.5 million. In Belgium, at Beobank, loans in excess of €750,000 are granted by the Business and Mortgage Loans Department. The Management Committee is required to decide on loans in excess of €1.25 million.

For the French banking scope (French network and Corporate network), which accounts for approximately 69 % o f the CMNE Group's outstanding customer loans, the breakdown of outstanding loans by rating category and by rating algorithm is as follows: T he best customers, represented by ratings equal to or above C-, total 89 % o f outstandings (between 85 % a nd 91
%, depending on the loan agreement concerned); 8 % o f outstandings have a rating of between D+ and E+: these ratings represent performing loans with a fairly high risk prole (between 6 % a nd 11 , depending on the loan agreement concerned); O utstanding loans that are classied as non-performing (E-), irrecoverable non-performing (E=) and in litigation (F) account for 3 % of total outstanding loans.

Individuals

(7,959 million)

0 510 1520 2530 3540 4550

A+A-B+B-C+C-D+D-E+E-E=F

1 % 1 % 0 % 1 % 2 % 3 % 4 % 8 % 13 % 14 % 32 %
20 %

Farmers

(873 million)

A+A-B+B-C+C-D+D-E+E-E=F

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