Société Générale / Risk report 2021 - Pillar 3 2020

6 CREDIT RISK CREDIT RISK MONITORING AND SURVEILLANCE SYSTEM PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 76 Credit risk corresponds to the risk of losses arising from the inability of the Group’s customers, issuers or other counterparties to meet their financial commitments. This risk includes the risk linked to securitisation activities, and may be further amplified by individual, country and sector concentration risk. CREDIT RISKMONITORING AND SURVEILLANCE 6.1 SYSTEM General principles governing risk-taking The risk approval process is based on the following main principles: the analysis and the validation of the files fall respectively and p independently to the sector of commercial follow-up of the client and to the dedicated risk units within the risk management function. In order to guarantee a consistent approach to Group risk-taking, this commercial monitoring sector and this risk unit examine all authorisation requests relating to a given client or category of clients. This commercial monitoring sector and this risk unit must be independent of each other; the internal rating of counterparties is a key criterion in the granting p policy. These ratings are proposed by the commercial monitoring sector and validated by the dedicated risk unit; for retail customers, the granting process is based on risk analysis p tools (score) controlled by the risk units. Credit decisions are subject to compliance with the granting criteria previously defined in credit policies whose effectiveness is regularly evaluated; a system of delegation of competence, largely based on the internal p rating of the counterparties, confers decision-making capacities to the risk units on the one hand and the commercial monitoring sectors on the other. The business line assumes the burden of provisions and losses related to its credit decisions as the first line of defence. The Risk Department submits recommendations to CORISQ on the evolution of the granting policy, with limits on credit portfolios, for the countries, geographic areas, sectors, products or types of customers presenting high concentration risks. The monthly Risk Monitoring Report presented to CORISQ by the Risk Department comments among others on the evolution of the Group’s credit portfolio and ensures compliance with the guidelines. Changes in the credit portfolio, changes in credit policy validated by CORISQ and respect for the Group’s risk appetite are presented at least quarterly to the Risk Committee of the Board of Directors. Monitoring individual concentration Societe Generale complies with regulations governing large exposures (major regulatory risks exposure cap of 25% of equity). Moreover, the Group has set a stricter internal limit at 10% of consolidated shareholders’ equity applying to any concentrated exposure on linked clients. Since 1 July 2018, the High Council for Financial Stability has imposed an exposure limit on most indebted companies established in France at a maximum level of 5% of eligible equity. concentration thresholds, based on the internal rating, are set by CORISQ and define the governance for validating the limits on individual concentrations. Exposures to groups of clients deemed significant by the Group are reviewed by the Large Exposure Committee chaired by the General Management. As part of identifying its risks, the Group also performs loss simulations by customer type and typical of significant individual exposures that the Group may have. Internal systems are implemented to identify and manage the risks of individual concentrations, particularly at granting. For example, The Group uses credit derivatives to reduce some exposures considered to be overly significant. Furthermore, the Group systematically seeks to mutualise risks with other banking partners by avoiding keeping an excessive share in the banking pool of large-scale companies. Monitoring country risk Country risk arises when an exposure (loan, security, guarantee or derivative) becomes susceptible to negative impact from changing regulatory, political, economic, social and financial conditions. Country risk breaks down into two major categories: political and non-transfer risk covers the risk of non-payment p resulting from either actions or measures taken by local government authorities (decision to prohibit the debtor from meeting its commitments, nationalisation, expropriation, non-convertibility, etc.), domestic events (riots, civil war, etc.) or external events (war, terrorism, etc.); commercial risk occurs when the credit quality of all counterparties p in a given country deteriorates due to a national economic or financial crisis, independently of each counterparty’s individual financial situation. This could be a macroeconomic shock (sharp slowdown in activity, systemic banking crisis, etc.), currency depreciation, or sovereign default on external debt potentially entailing other defaults. Overall limits and/or monitoring of exposures have been established for countries based on their internal ratings and governance indicators. The supervision is strengthened depending on the level of the country’s risk. Country limits are approved annually by Risk Division (or General Management in specific situations). They can be revised downward at any time if the country’s situation deteriorates or is expected to deteriorate. All Group exposures (securities, derivatives, loans and guarantees) are taken into account by this monitoring. The Country Risk methodology determines an initial risk country and a final risk country (after any guarantee-related effects), which is supervised using country limits for each counterparty.