Société Générale / Risk report 2021 - Pillar 3 2020

6 CREDIT RISK RISK MEASUREMENT AND INTERNAL RATINGS | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 83 To a very limited extent, Societe Generale also applies an IRB Foundation approach (where only the probability of default is estimated by the Bank, while the LGD and CCF parameters are determined directly by the supervisory authority) to a portfolio of specialised lending exposures, including those located in subsidiaries Franfinance Entreprises, Sogelease and Star Lease. capital requirement for ABCP (Asset-Backed Commercial Paper) securitisation. Moreover, the Group has authorisation from the regulator to use the IAA (internal assessment approach) method to calculate the regulatory In addition to the capital requirement calculation objectives under the AIRB method, the Group’s credit risk measurement models contribute to the management of the Group’s operational activities. They also constitute tools to structure, price and approve transactions and contribute to the setting of approval limits granted to business lines and the Risk function. TABLE 27: BREAKDOWN OF EAD (1) BY BASEL APPROACH 31.12.2020 31.12.2019 IRB 83% 81% Standard 17% 19% TOTAL 100% 100% Credit risk and counterparty credit risk. (1) TABLE 28: SCOPES OF APPLICATION OF THE IRB AND STANDARDISED APPROACHES FOR THE GROUP IRB approach Standardised approach French Retail Banking Majority of portfolios Some retail customer portfolios, including those of the Sogelease subsidiary International Retail Banking and Financial Services Subsidiaries KB (Czech Republic), CGI, Fiditalia, GEFA, SG Leasing SPA and Fraer Leasing SPA, SGEF Italy Other subsidiaries Global Banking and Investor Solutions Majority of Corporate and Investment Banking portfolios Private Banking, Securities Services and Brokerage, mainly the retail portfolios of the following subsidiaries: SGBT Luxembourg, SGBT Monaco, SG Private Banking Suisse For Private Banking, Securities Services and Brokerage, exposures granted to banks and companies, SG Hambros, Corporate Center Majority of portfolios - Credit risk measurement for wholesale clients For Corporate (including specialised financing), Banking and Sovereign portfolios, the Group has implemented the following system: RATING SYSTEM AND ASSOCIATED PROBABILITY OF DEFAULT The rating system consists in assigning a rating to each counterparty according to an internal scale, for which each grade corresponds to a probability of default determined using historical series observed by Standard & Poor’s for over more than twenty years. The following table presents the indicative corresponding scales of the main external credit assessment institutions and the corresponding average probabilities of default, as well as the Group's internal rating scale. The rating assigned to a counterparty is generally proposed by a model, and possibly adjusted by a credit analyst, who then submits it for validation by the Risk Management. The counterparty rating models are structured in particular according to the type of counterparty (companies, financial institutions, public entities, etc.), geographic region and size of the Company (usually assessed through its annual revenue). The Company rating models are underpinned by statistical models (regression methods) of client default. They combine quantitative parameters derived from financial data that evaluate the sustainability and solvency of companies and qualitative parameters that evaluate economic and strategic dimensions.