Société Générale / Risk report 2021 - Pillar 3 2020

5 CAPITAL MANAGEMENT AND ADEQUACY REGULATORY FRAMEWORK PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 46 REGULATORY FRAMEWORK 5.1 Since January 2014, Societe Generale has been applying the new Basel 3 Regulation implemented in the European Union via a directive (CRD4) and a regulation (CRR). The general framework defined by Basel 3 is structured around three pillars: Pillar 1 sets the minimum solvency requirements and defines the p rules that banks must use to measure risks and calculate the related capital requirements, according to standard or more advanced methods; Pillar 2 concerns the discretionary supervision implemented by the p competent authority, which allows them – based on a constant dialogue with supervised credit institutions – to assess the adequacy of capital requirements as calculated under Pillar 1, and to calibrate additional capital requirements taking into account all the risks to which these institutions are exposed; Pillar 3 encourages market discipline by developing a set of p qualitative or quantitative disclosure requirements which will allow market participants to better assess a given institution’s capital, risk exposure, risk assessment processes and, accordingly, capital adequacy. Some amendments to the European regulatory legislation were adopted in May 2019 (CRR2/CRD5). Although several of the new amendments are already in force, most of the new provisions will enter into force in June 2021. The new provisions include the following: NSFR: the text introduces regulatory requirements related to the p NSFR ratio. A 100% ratio has to be met as of June 2021; leverage ratio: a 3% minimum requirement to which an additional p 50% buffer for systemic entities will be added from 2023; counterparty derivatives risk: the “SA-CCR” Basel method replaces p the current “CEM” method to calculate the prudential exposure to derivatives using the Standardised Approach (SA); large exposures: the main change concerns the calculation of the p regulatory limit (25%) on Tier 1 (instead of total capital), as well as the introduction of a cross-specific limit on systemic institutions (15%); TLAC: The ratio requirement for G-SIBs has been introduced in CRR. p According to the Basel text, the G-SIBs must have an amount of eligible capital and debt equal to the highest between 16%+risk-weighted capital buffers and 6% of the leverage exposure in 2019, the ratio increasing to 18%+weighted risk cushions and 6.75% leverage in 2022. With regard to the implementation of the market risk reform (FRTB), after the publication of the first revised standard in January 2016 and of the consultation in March 2018 on this subject, the Basel Committee published in January 2019 its final text: BCBS457. In March 2020, the Basel Committee announced a one-year delay in the implementation of FRTB (1 January 2023 instead of 1 January 2022 as originally planned in the January 2019 text). The European FRTB calendar would be as follows: regarding reporting requirements: p in April 2020, EBA postponed the Standardised Approach (SA) - from Q1 2021 to Q3 2021, 2023 for the Internal Model Approach (IMA); - the capital requirements for FRTB would then become mandatory at p the end of 2023 at the earliest, or in 2024. In December 2017, the Group of Central Bank Governors and Heads of Supervision (GHOS), the Basel Committee’s oversight body, endorsed the regulatory reforms aiming to complete Basel 3. These new rules, which were to take effect from 2022, have been postponed to January 2023 with an overall output floor: the risk-weighted assets (RWA) will be floored to a percentage of the standard method (credit, market and operational). The output floor level will increase gradually, from 50% in 2023 to 72.5% in 2028. Nevertheless, these rules will have to be transposed into European law (CRR3/CRD6) to be applicable to the Group. In the face of the health crisis and of its economic and financial consequences, a number of measures have been taken by the supervisory and regulatory authorities. For example, the ECB announced the immediate implementation of Article 104a of CRD5: possible fulfilment of P2R requirement via 56% of CET1, 19% of AT1 and 25% of Tier 2 instruments (instead of 100% of CET1 previously), but also possibility to operate below the conservation cushion (CCB), as well as the countercyclical (CCyB) and the Systemic Risk Buffer (0% in France) ones. Besides, the European Parliament and the Council reached an agreement through the CRR “quick fix” regulation, implemented as of 30 June 2020. The most significant elements reside in the anticipation of the implementation date for the non-deduction of CET1 software, but also for the SME and “Infrastructure financing” discount factors. Regarding the leverage ratio, the implementation of the cushion (0.5% for the Group) has been postponed from 1 January 2022 to 1 January 2023 in order to be in line with the Basel 4 application date. Central bank reserves may be excluded from the exposure base (without increasing the 3% requirement) until 27 June 2021 . At the end of 2019, the ECB confirmed the level of additional capital requirements in respect of Pillar 2 (P2R or “Pillar 2 Requirement”), effective since 1 March 2019, at 1.75% for 2020. As part of the ECB Covid-19 specific measures, the 2020 Pillar 2 rate will remain at the same level in 2021. Detailed information on the G-SIB requirements and other prudential information are available on the Group website, www.societe generale.com , under “Universal Registration Document and Pillar 3”. Throughout 2020, Societe Generale complied with the minimum ratio requirements applicable to its activities.