Société Générale / Risk report 2021 - Pillar 3 2020

6 CREDIT RISK NEW DEFINITION OF DEFAULT | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 79 The majority of protection purchases (98% of outstanding amounts as at 31 December 2020) are made against European clearing houses, and all against counterparties with “Investment Grade” ratings (rating at least equal to BBB-). Moreover, the amounts recognised as assets (EUR 1.3 billion as at 31 December 2020 versus EUR 2.4 billion as at 31 December 2019) and liabilities (EUR 1.4 billion as at 31 December 2020 versus EUR 2.0 billion as at 31 December 2019) correspond to the fair value of credit derivatives mainly held under a transaction activity. As part of LCR stress tests, Article 30(2) of Delegated Act 2015/61 provides for a specific additional flow associated with a three-notch downgrade of the bank's rating. In this regard, the impact in terms of additional cash collateral in case of a three-notch downgrade of the Group's rating is estimated at EUR 3 billion as at 31 December 2020. Credit insurance The Group has been developing relationships with private insurers over the last several years in order to hedge some of its loans against commercial and political non-payment risks. This activity is performed within a risk framework and monitoring system approved by the Group’s General Management. The system is based on an overall limit for the activity, along with sub-limits by maturity, and individual limits for each insurance counterparty, the latter being furthermore required to meet strict eligibility criteria. There is also a limit for insured transactions in Non Investment Grade countries. NEWDEFINITION OF DEFAULT 6.3 The objective of the European Banking Authority (EBA) published Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No. 575/2013, applicable from 1 January 2021, and Regulation (EU) 2018/1845 of the European Central Bank (ECB) in relation to the threshold for assessing the materiality of credit obligations past due, applicable from 31 December 2020 at the latest, is to harmonise the definition of default across the European Union, thus contributing to improving consistency in the way EU banks apply regulatory requirements to their capital positions. In particular, they clarify all aspects relating to the application of the definition of default, including conditions for a return to non-defaulted status (introduction of a probation period), explicit criteria for classification of restructured loans as defaulted, and the introduction of materiality thresholds (an absolute one and a relative one) to identify past-due payments as defaulted. The Group has been applying these new provisions to identify defaulted exposures from 6 July 2020 to the entities whose capital requirements are determined using the internal ratings-based approach. The other entities, under the standardised approach, have implemented these new provisions since 1 January 2021, date when the internal parameters used to calculate expected losses will be adjusted for the whole Group. The preliminary assessments made by the Group show that the clarifications provided regarding the identification of defaulted loans remain consistent with the criteria used to assess whether Stage 3 exposures are doubtful according to IFRS 9 provisions on the recognition of expected credit losses (ECL). The Group considers that the changes brought about by the implementation of these new regulatory default provisions will have no material impact on its consolidated financial statements.