Société Générale / Risk report 2021 - Pillar 3 2020

9 MARKET RISK MARKET RISK MAIN MEASURES | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 175 AVERAGE CONTRIBUTION OF THE COMPONENTS IN 2020 GLOBAL STRESS TEST ONMARKET ACTIVITIES MARKET STRESS TEST This metric focuses on market risk and estimates the loss resulting from shocks on the set of risk factors. This stress test is based on 11 scenarios (1) (four historical and seven hypothetical). Main principles are as follows: the scenario considered in the market stress test is the worst of the p different scenarios defined; the shocks applied are calibrated on time horizons specific to each p risk factor (the time horizon can range from five days for the most liquid risk factors to three months for the least liquid); risks are calculated every day for each of the Bank’s market activities p (all products together), using each of the historical and hypothetical scenarios. Historical scenarios an increase in credit spreads) as well as a rebound scenario (marked by an increase in equity indices and a decrease in credit spreads). Societe Generale is currently using four historical scenarios in the calculation of the stress test, which cover the periods from October to December 2008 and March 2020. This method consists of an analysis of the major economic crises that have affected the financial markets: changes in the prices of financial assets (equities, interest rates, exchange rates, credit spreads, etc.) during each of these crises have been analysed in order to define scenarios for potential variations in these main risk factors which, when applied to the Bank’s trading positions, could generate significant losses. Accordingly, this approach makes it possible to determine the historical scenarios used for the calculation of the stress test. This set of scenarios is also the subject of regular reviews. In 2020, two new historical scenarios related to the Covid-19 crisis were integrated: a crisis scenario (marked by a decline in equity indices and Hypothetical scenarios The hypothetical scenarios are defined with the Group’s economists and are designed to identify possible sequences of events that could lead to a major crisis in the financial markets ( e.g. a major terrorist attack, political instability in the main oil-producing countries, etc.). The Group’s aim is to select extreme but plausible events which would have major repercussions on all international markets. Accordingly, Societe Generale has defined seven hypothetical scenarios. Regulatory indicators 99% VALUE-AT-RISK (VAR) Methodology The Internal VaR Model was introduced at the end of 1996 and has been approved by the French regulator within the scope of the regulatory capital requirements. The Value-at-Risk (VaR) assesses the potential losses on positions over a defined time horizon and for a given confidence interval (99% for Societe Generale). The method used is the “historical simulation” method, which implicitly takes into account the correlation between the various markets, as well as general and specific risk. It is based on the following principles: storage in a database of the risk factors that are representative of p Societe Generale’s positions ( i.e. interest rates, share prices, exchange rates, commodity prices, volatility, credit spreads, etc.). Controls are regularly performed in order to check that all major risk factors for the trading portfolio of the Group are taken into account by the internal VaR model; definition of 260 scenarios corresponding to one-day variations in p these market parameters over a rolling one-year period; these scenarios are updated daily with the inclusion of a new scenario and the removal of the oldest scenario. There are three coexisting methods for modelling scenarios (relative shocks, absolute shocks and hybrid shocks), the choice between these methods for a given risk factor is determined by its nature and its historical trend; the application of these 260 scenarios to the market parameters of p the day; revaluation of daily positions, on the basis of the 260 sets of adjusted p market parameters: in most cases this calculation involves a full repricing. Nonetheless, for certain risk factors, a sensitivity-based approach may be used. Main risk factors Description Interest rates Risk resulting from changes in interest rates and their volatility on the value of a financial instrument sensitive to interest rates, such as bonds, interest rate swaps, etc. Share prices Risk resulting from variations in prices and volatility of shares and equity indices, in the level of dividends, etc. Exchange rates Risk resulting from the variation of exchange rates between currencies and of their volatility. Commodity prices Risk resulting from changes in prices and volatility of commodities and commodity indices. Credit Spreads Risk resulting from an improvement or a deterioration in the credit quality of an issuer on the value of a financial instrument sensitive to this risk factor such as bonds, credit derivatives (credit default swaps for example). Including the ones used in the global stress tests on market activities. (1)