Société Générale / Risk report 2021 - Pillar 3 2020

6 CREDIT RISK CREDIT RISK HEDGING PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 78 CREDIT RISK HEDGING 6.2 Guarantees and collateral The Group uses credit risk mitigation techniques for both market and commercial banking activities. These techniques provide partial or full protection against the risk of debtor insolvency. There are two main categories: personal guarantees are commitments made by a third party to p replace the primary debtor in the event of the latter’s default. These guarantees encompass the protection commitments and mechanisms provided by banks and similar credit institutions, specialised institutions such as mortgage guarantors ( e.g. Crédit Logement in France), monoline or multiline insurers, export credit agencies, etc. By extension, credit insurance and credit derivatives (purchase of protection) also belong to this category; collateral can consist of physical assets in the form of property, p commodities or precious metals, as well as financial instruments such as cash, high-quality investments and securities, and also insurance policies. Appropriate haircuts are applied to the value of collateral, reflecting its quality and liquidity. In order to reduce its risk-taking, the Group is pursuing active management of its securities, in particular by diversifying them: physical collateral, personal guarantees and others (including CDS). During the credit approval process, an assessment is performed on the value of guarantees and collateral, their legal enforceability and the guarantor’s ability to meet its obligations. This process also ensures that the collateral or guarantee successfully meets the criteria set forth in the Capital Requirements Directive (CRD). The guarantors are subject to an internal rating updated at least annually. Regarding collateral, regular revaluations are made on the basis of an estimated disposal value composed of the market value of the asset and a discount. The market value corresponds to the value at which the good should be exchanged on the date of the valuation under conditions of normal competition. It is preferably obtained on the basis of comparable assets, failing this by any other method deemed relevant (example: value in use). This value is subject to haircuts depending on the quality of the collateral and the liquidity conditions. In accordance with the requirements of European Regulation No. 575/2013 (CRR), the Group applies minimum collateralisation frequencies for all collateral held in the context of commitments granted (financial collateral, commercial real estate, residential real estate, other security interests, leasing guarantees). Closer valuations must be carried out in the event of a significant change in the market concerned, the default or litigation of the counterparty or at the request of the risk management function. In addition, the effectiveness of credit risk hedging policies is monitored as part of the LGD. It is the responsibility of the risk management function to validate the operational procedures put in place by the business lines for the periodic valuation of collateral (guarantees and collateral), whether automatic valuations or on an expert opinion and whether during the credit decision for a new competition or during the annual renewal of the credit file. The amount of guarantees and collateral is capped at the amount of outstanding loans less provisions, i.e. EUR 319 billion as at 31 December 2020 (compared with EUR 302 billion as at 31 December 2019), of which EUR 156 billion for retail customers and EUR 163 billion for other types of counterparties (compared with EUR 139 billion and EUR 163 billion as at 31 December 2019, respectively). The outstanding loans covered by these guarantees and collateral correspond mainly to loans and receivables at amortised cost, which amounted to EUR 258 billion as at 31 December 2020, and to off-balance sheet commitments, which amounted to EUR 51 billion (compared with EUR 238 billion and EUR 57 billion as at 31 December 2019 respectively). The amounts of guarantees and collateral received for performing outstanding loans (Stage 1) and under-performing loans (Stage 2) with payments past due amounted to EUR 4.3 billion as at 31 December 2020 (EUR 4.5 billion as at 31 December 2019), including EUR 1.7 billion on retail customers and EUR 2.6 billion on other types of counterparties (versus EUR 1.5 billion and EUR 3.0 billion as at 31 December 2019 respectively). The amount of guarantees and collateral received for non-performing outstanding loans as at 31 December 2020 amounted to EUR 4.5 billion (compared with EUR 3.9 billion as at 31 December 2019), of which EUR 1.8 billion on retail customers and EUR 2.7 billion on other types of counterparties (compared with EUR 1.9 billion and EUR 2.0 billion respectively as at 31 December 2019). These amounts are capped at the amount of outstanding. Use of credit derivatives to manage Corporate concentration risk Within Corporate and Investment Banking, the Performance & Scarce Resources management (PSR) team is responsible for working in close cooperation with the Risk Division and the businesses to reduce excessive portfolio concentrations, react quickly to any deterioration in the creditworthiness of a particular counterparty and suggest actions improving the capital allocation. PSR is part of the department responsible for the definition and effective deployment of the strategy, performance and scarce resources management for the credit and loan portfolio. The Group may use credit derivatives for in the management of its Corporate credit portfolio, primarily to reduce individual, sector and geographic concentrations and to implement a proactive risk and capital management approach. Total outstanding purchases of protection through Corporate credit derivatives were stable at EUR 2.5 billion in nominal terms and a corresponding fair value of EUR 7.3 million at the end of December 2020 (compared with EUR 2.5 billion nominal value and a corresponding fair value of EUR -16 million at the end of December 2019). New operations have mainly been performed to improve capital allocation (EUR 1.9 billion) and, to a lower extent, to reduce concentration risk (EUR 0.6 billion). Over 2020, the credit default swaps (CDS) spreads of European investment grade issues (Itraxx index) were volatile, peaking at 151 bps at the end of March followed by a downward trend (the index reached 50 bps at the end of December 2020). The overall sensitivity of the portfolio (Price Value of a Basis Point) is falling due to the reduction in the average maturity of the protections.