Société Générale / Risk report 2021 - Pillar 3 2020

10 OPERATIONAL RISK OPERATIONAL RISK MEASUREMENT PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 192 OPERATIONAL RISKMEASUREMENT 10.3 Since 2004, Societe Generale has used the Advanced Measurement Approach (AMA) allowed by the Capital Requirements Directive to measure operational risk. This approach, implemented across the main Group entities, notably makes it possible to: identify the businesses that have the greatest risk exposures; p identify the types of risk that have the greatest impact on p the Group’s risk profile and overall capital requirements; enhance the Group’s management of operational risks. p Operational risk modelling The statistical method used by the Group for operational risk modelling is based on the Loss Distribution Approach (LDA) for AMA internal model. Under this approach, operational risks are modeled using segments, each segment representing a type of risk and a Group core business. The frequency and severity of operational risks, based on past internal losses, external losses, the internal and external environment, and scenario analyses, are estimated and the distribution of annual losses is calculated for each segment. This approach is supplemented by cross-business scenario analyses that measure cross-business risks for core businesses, such as cybercriminality and the flooding of the river Seine. modification of the copula used in the AMA model to take into account the dependencies between extreme events and not taking into account the opportunity costs in the AMA calculation. Aside from the individual risks associated with each segment or cross-business scenario analysis, the model takes into account the diversification between the various types of risk and the core businesses, as well as the effect of insurance policies taken out by the Group. To comply with the regulations (Delegated Regulation (EU) 2018/959), the Group made two methodological changes in 2020: the The Group’s regulatory capital requirements for operational risks within the scope covered by the (AMA) internal model are then defined as the 99.9% quantile of the Group’s annual loss distribution. For some Group entities, notably in retail banking activities abroad, the standard method is applied: the calculation of capital requirements is defined as the average over the last three years of a financial aggregate based on the Product Net Banking multiplied by factors defined by the regulator and corresponding to each category of activity. To make the calculation, all of the Group’s business lines are broken down into the eight regulatory activities. Societe Generale’s total capital requirements for operational risks were EUR 3.9 billion at the end of 2020, representing EUR 49.0 billion in risk-weighted assets. This assessment includes the capital requirement of AMA and Standard perimeters. Insurance cover in risk modelling In accordance with regulations, Societe Generale incorporates risk cover provided by insurance policies when calculating regulatory capital requirements for operational risks, within the limit of 20% of said requirements. These insurance policies cover part of the Group’s major risks, i.e. civil liability, fraud, fire and theft, as well as systems interruptions. Risk reduction through insurance policies resulted in a 3.5% decrease in total capital requirements for operational risks.