Société Générale / Risk report 2021 - Pillar 3 2020

3 RISKMANAGEMENT ORGANISATION RISK APPETITE – GENERAL FRAMEWORK | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 31 Regarding more specifically stress tests, or crisis simulations, they assess what would be the behaviour of a portfolio, activity, entity or Group in a context of degraded activity. Within the Group, stress tests contribute to the identification, measurement and management of risks, as well as to the assessment of the adequacy of capital and liquidity to the Group's risk profile. Thus, the stress tests: are a privileged measure of the resilience of the Group, its activities p and its portfolios, and are an integral part of the process of building risk appetite; are based on hypothetical economic scenarios defined in p conjunction with the Economic and Sectoral Studies department, or historical scenarios. The stress tests break down these scenarios into impacts on the Group's activities, by taking into account the reaction capacities of the activities, by systematically combining quantitative methods and expert judgment (risks, finance or business lines); can also be based on sensitivity analysis (single or multi-factor risk). p The stress test system thus comprises: a global stress test, integrated into the budget process (Strategic p and financial plan), to ensure that the Group’s profile meets its objectives in the event of an adverse scenario, but also to quantify the deterioration in the profitability of the Business Units in this scenario. The stress test system is an integral part of the ICAAP (Internal Capital Adequacy Assessment Process); specific stress tests by type of risk or portfolio: p stress tests on credit risk complete the overall analysis with a - more granular approach, and thus shed light on the fixing of risk appetite at a portfolio, activity, etc. They are also used to refine the identification, measurement and operational management of this risk, stress tests on market activities are based on historical and - hypothetical scenarios and apply to the entire Group. They are supplemented by specific sensitivity stress tests on certain risk factors (rates, equities, etc.) or certain activities (emerging markets, etc.). A stress test limit is established for these different risk measures, stress tests assess the sensitivity of structural interest rate risk. - The exercise focuses on changes in the economic value of assets and liabilities in bank portfolios and on changes in the net interest margin generated by these assets and liabilities. The Group sets limits on these sensitivities in scenarios of translation and deformation (steepening and flattening) of the yield curves, a stress test on social commitments consists of simulating the - impact of variations in market risk factors (inflation, interest rate, etc.) on the Group’s net position (dedicated investments minus the corresponding social commitments). A stress test limit is established on this indicator, liquidity stress tests, - an assessment of operational risk under stress uses the scenario - analysis and loss modelling work carried out to calibrate the Group's capital requirement in terms of operational risk, and makes it possible to understand the exposure to operational losses, including exposure to rare and severe losses not present in the history, stress tests of insurance activities support the process of defining - the risk appetite of the Insurance Business Unit, which is based on minimum objectives of profitability and solvency in central scenario and in stressed scenario. In addition, the Insurance Business Unit uses also results from stress tests in order to define its hedging policy, the distribution of its assets as well as the dividend distribution policy; reverse stress tests, both as part of the risk appetite and therecovery p plan. The impact of these stress tests is typically defined by a breaking point in the solvency ratio or liquidity indicator, which poses a significant threat to the Bank. Hypothetical scenarios leading to this breaking point are then constructed in order to identify new weaknesses. In addition to internal stress test exercises, the Group is part of the sample of European banks participating in major international stress test programmes piloted by the EBA (European Banking Authority) and the ECB (European Central Bank). In addition, and specifically on climate risk, the Group participates on a voluntary basis in exploratory climate stress exercises organised by ACPR ( Autorité de Contrôle Prudentiel et de Résolution ) and the European Banking Authority in 2020. DEFINITION OF THE “CENTRAL” AND “STRESS” ECONOMIC SCENARIOS Central scenario Its construction is based first of all on a set of observed factors: recent economic situation, economic policy orientations (budgetary, monetary and exchange rate policy), etc. From these observed factors, economists determine the most likely trajectory of economic and financial variables for the desired forecast horizon. Stressed scenario The severity of the stress scenario, determined by the deviation of the GDP trajectory from the central scenario, is based on the magnitude of the 2008-2009 crisis and has been adjusted to take into account the impacts, both health, economic and financial, of the Covid-19 crisis on the basis of current knowledge.