Société Générale / Risk report 2021 - Pillar 3 2020

2 RISK FACTORS RISK FACTORS | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 19 MARKET AND STRUCTURAL RISKS 2.2.3 Market risk corresponds to the risk of impairment of financial instruments resulting from changes in market parameters, the volatility of these parameters and the correlations between these parameters. The concerned parameters include exchange rates, interest rates, as well as the prices of securities (shares, bonds) and commodities, derivatives and any other assets. 2.2.3.1 Changes and volatility in the financial markets may have a material adverse effect on the Group’s business and the results of market activities. In the course of its activities, the Group takes trading positions in the debt, currency, raw material and stock markets, as well as in unlisted shares, real estate assets and other types of assets including derivatives. The Group is thus exposed to “market risk”. Volatility in the financial markets can have a material adverse effect on the Group’s market activities. In particular: significant volatility over a long period of time could lead to p corrections on risky financial assets (and especially on the riskiest assets) and generate losses for the Group; a sudden change in the levels of volatility and its structure, or p alternative short-term sharp declines and fast rebounds in markets, could make it difficult or more costly to hedge certain structured products and thus increase the risk of loss for the Group. Severe market disruptions and high market volatility have occurred in recent years and may occur again in the future (the Covid-19 pandemic being the latest example; see the risk factor 2.2.1.1 “The coronavirus (Covid-19) pandemic and its economic consequences could negatively affect the Group’s business and financial performance” for more information), which could result in significant losses for the Group’s markets activities. Such losses may extend to a broad range of trading and hedging products, including swaps, forward and future contracts, options and structured products. In the event that a low-volatility environment emerges, reflecting a generally optimistic sentiment in the markets and/or the presence of systematic volatility sellers, increased risks of correction may also develop, particularly if the main market participants have similar positions on certain products. Such corrections could result in significant losses for the Group’s market activities. The volatility of the financial markets makes it difficult to predict trends and implement effective trading strategies; it also increases risk of losses from net long positions when prices decline and, conversely, from net short positions when prices rise. Such losses could have a material adverse effect on the Group’s results of operations and financial position. Similarly, the sudden decrease, or even the cancellation of dividends, as experienced during in the Covid-19 pandemic, and changes in the correlations of different assets of the same class, could affect the Group’s performance, with many activities being sensitive to these risks. A prolonged slowdown in financial markets or reduced liquidity in financial markets could make asset disposals or position manoeuvrability more difficult, leading to significant losses. In many of the Group’s activity segments, a prolonged decline in financial markets, particularly asset prices, could reduce the level of activity in these markets or their liquidity. These variations could lead to significant losses if the Group were unable to quickly unwind the positions concerned, adjust the coverage of its positions, or if the assets held in collateral could not be divested, or if their selling prices did not cover the Group’s entire exposure on defaulting loans or derivatives. The assessment and management of the Group’s market risks are based on a set of risk indicators that make it possible to evaluate the potential losses incurred at various time horizons and given probability levels, by defining various scenarios for changes in market parameters impacting the Group’s positions. These scenarios are based on historical observations or are theoretically defined. However, these risk management approaches are based on a set of assumptions and reasoning that could turn out to be inadequate in certain configurations or in the case of unexpected events, resulting in a potential underestimation of risks and a significant negative effect on the results of the Group’s market activities. Furthermore, in the event of a deterioration of the market situation, the Group could experience a decline in the volume of transactions carried out on behalf of its customers, leading to a decrease in the revenues generated from this activity and in particular in commissions received. For information purposes, Global Markets & Investor Services activities, which account for most of the Group’s market risks, represented EUR 4.2 billion of net banking income in the first half of 2020, or 19% of the Group’s total revenues. At 31 December 2020, risk-weighted assets (RWA) subject to market risk represented EUR 15.3 billion (representing 4% of the Group’s total RWA). 2.2.3.2 Changes in interest rates may adversely affect retail banking activities. The Group generates a significant part of its income through net interest margin and as such remains highly exposed to interest rate fluctuations as well as to changes in the yield curve, particularly in its retail banking activities. The Group’s results are influenced by changes in interest rates in Europe and in the other markets in which it operates. In Europe in particular, a protracted environment of low or even negative interest rates has affected and could continue to adversely affect the Group’s retail banking income, notably in France. For information, net banking income (NBI) of French retail banking amounted to EUR 7.3 billion in 2020. For more details on structural interest rate risks, see Chapter 11 Structural interest rate risks of the present document and Note 8.1 Segmented reporting of the 2021 Universal Registration Document. 2.2.3.3 Fluctuations in exchange rates could adversely affect the Group’s results. As a result of its international activities and its geographical presence in many countries, the Group’s revenues and expenses as well as its assets and liabilities are recorded in different currencies, which exposes it to the risk of exchange-rate fluctuations. Because the Group publishes its consolidated financial statements in euros, which is the currency of most of its liabilities, it is also subject to translation risk for items recorded in other currencies, in the preparation of its consolidated financial statements. Exchange rate fluctuations of these currencies against the euro may adversely affect the Group’s consolidated results, financial position and cash flows. Exchange rate fluctuations may also negatively affect the value (denominated in euros) of the Group’s investments in its subsidiaries outside the eurozone. For information, at 31 December 2020, out of a total of EUR 1,258 billion of assets on the balance sheet, 39% were recorded in euros, 37% in US dollars and 7% in yens. See section 9.4 Market Risk Capital Requirements and Risk-Weighted Assets and section 11.3 Structural exchange rate risk of the present document, as well as Note 8.5 Foreign exchange transactions in Chapter 6 of the 2021 Universal Registration Document.