Société Générale / Risk report 2021 - Pillar 3 2020

3 RISKMANAGEMENT ORGANISATION RISK APPETITE | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 27 A robust financial strength profile The Group seeks to achieve sustainable profitability, relying on a robust financial profile consistent with its diversified banking model, by: aiming for profitable and resilient business development; p maintaining a target rating allowing access to financial resources at p a cost consistent with the development of the Group’s businesses and its competitive positioning; calibrating its capital and hybrid debt targets to ensure: p meeting the minimum regulatory requirements on capital ratios, - one-year coverage of the “internal capital requirement” using - available CET1 capital, a sufficient level of creditor protection consistent with a debt - issuance programme that is particularly hybrid consistent with the Group's objectives in terms of rating and regulatory ratios such as Tier 1, TLAC (“Total Loss Absorbing Capacity”), MREL (“Minimum Requirement for own funds and Eligible Liabilities”), and the leverage ratio; ensuring resilience of its liabilities, which are calibrated by taking p into account a survival horizon in a liquidity stress ratio, compliance with LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio) regulatory ratios and the level of dependence on short-term fundings; controlling the leverage ratio through a leverage ratio target. p Credit risk (including concentration effects) Credit risk appetite is managed through a system of credit policies, risk limits and pricing policies. When it takes on credit risk, the Group focuses on medium- and long-term client relationships, targeting both clients with which the bank has an established relationship of trust and prospects representing profitable business development potential over the mid-term. Acceptance of any credit commitment is based on in-depth client knowledge and a thorough understanding of the purpose of the transaction. In a credit transaction, risk acceptability is based first on the borrower’s ability to meet its commitments, in particular through the cash flows which will allow the repayment of the debt. For medium and long-term operations, the funding duration must remain compatible with the economic life of the financed asset and the visibility horizon of the borrower’s cash flow. Security interests are sought to reduce the risk of loss in the event of a counterparty defaulting on its obligations, but may not, except in exceptional cases, constitute the sole justification for taking the risk. Security interests are assessed with prudent value haircuts and paying special attention to their actual enforceability. Complex transactions or those with a specific risk profile are handled by specialised teams within the Group with the required skills and expertise. The Group seeks risk diversification by controlling concentration risk and maintaining a risk allocation policy through risk sharing with other financial partners (banks or guarantors). Counterparty ratings are a key criterion of the credit policy and serve as the basis for the credit approval authority grid used in both the commercial and risk functions. The rating framework relies on internal models. Special attention is paid to timely updating of ratings (which, in any event, are subject to annual review). The risk measure of the credit portfolio is based primarily on the Basel parameters that are used to calibrate the capital need. As such, the Group favours the so-called advanced Basel models (AIRB), which are more risk-sensitive and more adapted to the specific characteristics of the bank's portfolio. These measures are complemented by an internal stress-sized risk assessment, either at the global portfolio level or at the sub-portfolio level, linking risk measures and rating migration to macro-economic variables. In addition, the calculation of expected losses under the provisions of IFRS9, used to determine the level of impairment on healthy outstanding amounts, provides additional insight into assessing portfolio risk. In consultation with the Risk Department, the businesses implement pricing policies that are differentiated according to the level of risk of counterparties and transactions. The purpose of pricing a transaction is to ensure acceptable profitability, in line with the objectives of ROE (Return on Equity) of the business or entity, after taking into account the cost of the risk of the transaction in question. However, the pricing of an operation may be adapted in some cases to take into account the overall profitability and the development potential of the customer relationship. Proactive management of counterparties whose situation has deteriorated is key to containing the risk of final loss in the event of counterparty failure. As such, the Group implements rigorous procedures to monitor counterparties whose risk profiles are deteriorating. In addition, the trades and entities, in conjunction with the Risk sector, and through collaborators specializing in recovery and litigation, work together to effectively protect the Bank's interests in the event of default. Counterparty credit risk Counterparty credit risk management is based on a combination of several types of indicators: indicators of potential future exposures (potential future exposures, p or PFE), aimed at measuring exposure to our counterparties: the Group controls idiosyncratic counterparty credit risks via a - set of CVaR (Counterparty VaR) (1) limits. The CVaR measures the potential future exposure linked to the replacement risk in the event of default by one of the group's counterparties. The CVaR is calculated for a 99% confidence level and different time horizons, from one day until the maturity of the portfolio, in addition to the risk of a counterparty default, the CVA (Credit - Valuation Adjustment) measures the adjustment of the value of our portfolio of derivatives and repos account the credit quality of our counterparties; The CVaR economic indicator is built on the same modelling assumptions as the regulatory Effective Expected Positive Exposure (EEPE) indicator used to calculate RWAs. (1)