Société Générale / Risk report 2021 - Pillar 3 2020

12 LIQUIDITY RISK OBJECTIVES AND GUIDING PRINCIPLES PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 204 Liquidity risk is defined as the Group's inability to meet its financial obligations at a reasonable cost. Funding risk is defined as the risk of the Group being unable to finance the development of its activities in line with its commercial objectives and at a competitive cost. OBJECTIVES AND GUIDING PRINCIPLES 12.1 The liquidity and funding management set up at Societe Generale aims at ensuring that the Group can (i) fulfil its payment obligations at any moment in time, during normal course of business or under lasting financial stress conditions (management of liquidity risks); (ii) raise funding resources in a sustainable manner, at a competitive cost compared to peers (management of funding risks). Doing so, the liquidity and funding management set up ensures that both regulatory requirements and the risk appetite set by the Group are met. To achieve these objectives, Societe Generale has adopted the following guiding principles: mutualising resources, optimising costs and ensuring consistent risk p management by centralising liquidity and funding management at the Corporate centre level, mainly in the name of the mother company (Societe Generale SA). For that purpose, Business Units have tight constraints in terms of the transformation position they can run, hence need to match their assets and liabilities by transacting with the Corporate centre, along a Funds Transfer Pricing mechanism. Assets or liabilities which do not have a set contractual maturity ( e.g. sight deposits) have their maturity assessed along quantitative models or conventions proposed by the Finance Division and by the Business Units and validated by the Risk Division (see below); planning for funding resources in consideration of both the business p development objectives and the risk appetite set by the Board of Directors (see section 2 below); ensuring that funding risks are mitigated through a proper p diversification of funding resources in terms of currencies, investor pools, maturity buckets, liability format ( e.g. benchmark bond issuance, with a split along various seniority levels, issuance in the form of structured notes, issuance in the form of unsecured and secured notes. In order to optimise funding costs, the majority of bond issuance is made in the name of the mother company. However, a degree of diversification is sought by leveraging the capacity of some subsidiaries to raise funds in a way which complements the mother company’s funding, i.e. raising funds from local investors in local currencies; ensuring that Societe Generale keeps liquid reserves in sufficient p amount to comply with the survival horizon under stress set by the Board of Directors. Liquid reserves are in the form of cash held at central banks and highly liquid securities, split between the Banking Book (under the direct ownership of the Group Treasury Department) or the Trading Book (mainly within the Global Markets division, under a permanent control of the Group Treasury Department); ensuring Societe Generale has readily available remediation options p to face potential stress situations, through contingency plans aimed at detecting any stress signals at an early stage and defining in advance the crisis management setup. OPERATIONAL IMPLEMENTATION 12.2 The key operational steps of liquidity and funding management are as follows: risk identification is a process which is set out and documented by p the Risk Division, in charge of establishing a mapping of liquidity risks. This process is conducted yearly with each Business Unit and within the Group Treasury Department, aimed at screening all material risks and checking their proper measurement and capturing the control framework. In addition, a Reverse Stress Testing process exists, which aims at identifying and quantifying the risk drivers which may weigh most on the liquidity profile under assumptions even more severe than used in the regular stress test metrics; definition, implementation and periodic review of liquidity models p and conventions used to assess the duration of assets and liabilities without a set contractual maturity and to assess the liquidity profile under stress. Liquidity models are managed along the overall Model Risk Management governance, also applicable to other risk factors (market, credit, operational), controlled by the Group Risk division; yearly definition of the risk appetite for liquidity and funding risks, p whereby the Board of Directors sets targets for key metrics, and related alert thresholds. Such risk appetite targets are then cascaded down per Business Units. The risk appetite is framed along the following metrics: key regulatory indicators (LCR and NSFR), - the footprint of the Group in Short-Term Wholesale funding - markets, the survival horizon under an adverse stress scenario, combining - a severe market and systemic shock and an idiosyncratic shock. In addition to the main adverse scenario, Societe Generale also checks its survival horizon under an extreme stress scenario. For both scenarios, the idiosyncratic shock is characterised by one of its main consequences, which would be an immediate 3-notch downgrade of Societe Generale’s long-term rating. In such adverse or extreme scenarios, the liquidity position of the Group is assessed over time, taking into account the negative impacts of the scenarios, such as deposit outflows, drawing by clients of the