Société Générale / Risk report 2021 - Pillar 3 2020

6 CREDIT RISK RISK MEASUREMENT AND INTERNAL RATINGS PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 90 Basel portfolio 31.12.2019 A-IRB LGD Estimated losses excluding margin of prudence Observed EAD/A-IRB EAD Real estate loans (excl. guaranteed exposures) 18% 12% - Revolving credits 46% 39% 73% Other loans to individual customers 26% 21% - VSB and professionals 28% 22% 76% TOTAL GROUP RETAIL CLIENTS 25% 19% 74% Governance of the modelling of credit risk Credit own funds estimation models are subject to the global model risk management framework (see Chapter 14 “Model risk”). The first line of defence is responsible for designing, putting into production, using and monitoring models, in compliance with model risk management governance rules throughout the model lifecycle, which includes for credit risk internal models traceability of development and implementation stages and annual backtesting. Depending on the specificities of each model family, in particular depending on the regulatory environment, the second line of defence may decide to perform the backtesting of the model family. In such case the LoD2 is responsible for defining a dedicated standard for the model family and informing the first line of defence (starting with the model owner) of the outcome of the backtesting. computation, any model change to the Group’s credit risk measurement system is then subjected to two main types of notification to the competent supervisor, depending on the significant nature of the change laid down by this regulation itself: The Model Risk Division, reporting directly to the Risk Division, acts as a second line of defence for all credit risk models. Independent model review teams rely, for the conduct of their missions, on principles of control of the theoretical robustness (assessment of the quality of the design and development) of the models, the conformity of the implementation and the use, the continuous follow-up of model relevance over time. The independent review process concludes with (i) a report summarizing the scope of the review, the tests performed, the results of the review, the conclusions or recommendations and with (ii) Reviewing and Approval Committees (respectively “ Comité Modèles ” and “Comité Experts” in the case of credit risk models). The model control system gives rise to recurring reports to the Risk Department within the framework of various bodies and processes (Group Model Risk Management Committee, Risk Appetite Statement/ Risk Appetite Framework, monitoring of recommendations, etc.) and annually to the General Management (CORISQ). The Model Risk Division reviews, amongst others, new models, backtesting results and any change to the credit own funds estimation models. In accordance with the Delegated Regulation (EU) No. 529/2014 of 20 May 2014 relating to the follow-up of internal models used for own funds significant changes which are subject to a request for approval prior p to their implementation; other changes which should be notified to the competent p authorities: i) prior to their implementation: non-material changes, according to the criteria defined by the regulation, are notified to the Supervisor (ex-ante notification); barring a negative response, these may be implemented within a two months period; ii) after their implementation: these changes are notified to the competent authorities after their implementation at least once a year, through a specific report (ex-post notification). The Internal Audit Division, as a third line of defence, is responsible for periodically assessing the overall effectiveness of the model risk management framework (relevance of the model risk governance and efficiency of second line of defence activities) and performing the independent model audit. Climate risk – Measuring sensitivity to transition risk Transition risk’s impact on Societe Generale Corporate clients’ credit risk has been identified as the main climate change-related risk for the Group. In order to measure this impact, the Group is gradually implementing a Vulnerability Indicator which aims to reinforce the credit analysis on the most exposed counterparties. The climate risk management system is further detailed in section “Climate risk management” of Chapter 5.4.2 “Positive climate action” of the 2021 Universal Registration Document.