Société Générale / Risk report 2021 - Pillar 3 2020

2 RISK FACTORS RISK FACTORS PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 22 management of the interest rate risk of the investment portfolio and p of the liquidity risk of all balance sheet and off-balance sheet items uses behavioural models that depend on market conditions. These models, based in particular on historical observations, could have an impact on the hedging of these risks when unprecedented events occur. In addition, the Group has initiated an evolution of its system of internal credit risk models (project “Haussmann”). This evolution could have a significant impact on the calculation of its RWA credit and counterparty credit risk in the event of delay in the schedule for submitting its models to the supervisor or in the event of late validation by the supervisor. 2.2.4.6 The Group may incur losses as a result of unforeseen or catastrophic events, including health crises, terrorist attacks or natural disasters. Covid-19 pandemic) or a crisis related to the pollution of the natural environment could have a significant impact on the Group’s activities. Also, terrorist attacks, natural disasters (including earthquakes, such as in Romania, and floods, such as the exceptional flooding of the Seine in Paris), extreme weather conditions (such as heatwaves), or major social unrest (such as the Gilets jaunes movement in France) could disturb the Group’s activities. The Group remains dependent on its natural and social environment. The occurrence of a new epidemic or pandemic crisis (such as the Such events could create economic and financial disruptions or lead to operational difficulties (including travel limitations or relocation of affected employees) for the Group. These events could impair the Group’s ability to manage its businesses and also expose its insurance activities to significant losses and increased costs (such as higher re-insurance premiums). Upon the occurrence of such events, the Group could incur losses. LIQUIDITY AND FUNDING RISKS 2.2.5 2.2.5.1 The Group’s access to financing and the cost of this financing could be negatively affected in the event of a resurgence of financial crises or deteriorating economic conditions In past crises (such as the 2008 financial crisis, the eurozone sovereign debt crisis or more recently the tensions on the financial markets linked to the Covid-19 pandemic before the intervention of the central banks), access to financing from European banks was intermittently restricted or subject to less favourable conditions. If unfavourable debt market conditions were to reappear following a new systemic or Group-specific crisis, the effect on the liquidity of the European financial sector in general and on the Group in particular could be very significantly unfavourable and could have an adverse impact on the Group’s operating results as well as its financial position. For several years, central banks have taken measures to facilitate financial institutions’ access to liquidity, in particular by lowering interest rates to historical lows and by setting up TLTRO (Targeted Longer-Term Refinancing Operations) type facilities. In the event that central banks put an end to these extraordinary measures, the Group could face an unfavourable evolution of its financing cost and of its access to liquidity. In addition, if the Group were unable to maintain a satisfactory level of deposits from its customers, it could be forced to resort to more expensive financing, which would reduce its net interest margin as well as its results. The Group’s regulatory short-term liquidity coverage ratio (LCR) stood at 149% at 31 December 2020 and liquidity reserves amounted to EUR 243 billion at 31 December 2020. 2.2.5.2 A downgrade to the Group’s external rating or to the sovereign rating of the French state could have an adverse effect on the Group’s cost of financing and its access to liquidity. For the proper conduct of its activities, the Group depends on access to financing and other sources of liquidity. In the event of difficulties in accessing the secured or unsecured debt markets on terms it considers acceptable, due to market conditions or factors specific to the Group, or if it experiences unforeseen outflows of cash or collateral, including material decreases in customer deposits, its liquidity could be impaired. In addition, if the Group is unable to maintain a satisfactory level of customer deposits collection, it may be forced to turn to more expensive funding sources, which would reduce the Group’s net interest margin and results. The Group is exposed to the risk of an increase in credit spreads. The Group’s medium- and long-term financing cost is directly linked to the level of credit spreads which can fluctuate depending on general market conditions. These spreads can also be affected by an adverse change in France’s sovereign debt rating or the Group’s external ratings by rating agencies. The Group is currently monitored by four financial rating agencies: Fitch Ratings, Moody’s, R&I and Standard & Poor’s. The downgrading of the Group’s credit ratings, by these agencies or by other agencies, could have a significant impact on the Group’s access to funding, increase its financing costs and reduce its ability to carry out certain types of transactions or activities with customers. This could also require the Group to provide additional collateral to certain counterparties, which could have an adverse effect on its business, financial position and results of operations. The deterioration of the economic environment following the health crisis and its impact on the Group, particularly in terms of profitability and cost of risk, could increase the risk of external ratings downgrades. The Group’s ratings could be placed under negative watch or be subject to a downgrade. In addition, France’s sovereign ratings could also be downgraded due to an increase in its debt and deficits (further increased by the Covid-19 pandemic and the response measures taken by the French government). These elements could have a negative impact on the Group’s financing costs and its access to liquidity. The Group’s ratings by Fitch Ratings, Moody’s, R&I and Standard & Poor’s are available on the Group’s website ( https://investors.societegenerale .com/en/financial-and-non-financial-information/ratings/credit-ratings ). Access to financing and liquidity constraints could have a material adverse effect on the Group’s business, financial position, results of operations and ability to meet its obligations to its counterparties. For 2021, the Group has planned a funding programme of approximately EUR 16 billion in vanilla long-term debt, in senior preferred and secured debt as well as in senior non-preferred debt and subordinated debt. At 31 December 2020, the Group had raised a total of EUR 37.2 billion of long-term funding (EUR 34.3 billion for the parent company and EUR 2.9 billion for its subsidiaries) which relates, at the parent company level, to senior structured issues (EUR 18 billion), subordinated issues (EUR 2.6 billion), senior vanilla non-preferred issues (EUR 9.8 billion), unsecured senior vanilla preferred issues (EUR 2.6 billion) and secured issues (EUR 1.3 billion).